
Hi,


I know this model from a theoretical perspective and haven't used it yet in practice...

Setting 100% confidence on your view simply means that the optimizer used on the back of your black litterman (return forecasts) model will diregards the equlibrium-implied return & use only your forecast.

It is indeed very likely that setting even a confidence level lower but high (say 80%) will result in optimal weight in that asset almost identical that if you had 100% confidence...but it will depend of how much your view differs from the equilibrium-implied return (since BL mix them both, weighting by your confidence level...roughly) and if you have imposed constraints to the optimization (usually classic MV) on the back of it...but I am not sure why one would impose constraints in this case...?

As mentioned, no direct real-life experience, so any thoughts & remarks on what I said is greatly appreciated

Rgds,
Julien




> Date: Fri, 27 Mar 2009 01:06:47 +0100
> From: bastian2507hk@yahoo.co.uk
> To: r-sig-finance@stat.math.ethz.ch
> Subject: [R-SIG-Finance] Black Litterman question
> 
> Hi all,
> 
> my question is aimed at the Black-Litterman experts. I am constructing a 
> portfolio consisting of various equity indices and express 1 absolute 
> view and 1 relative view on another 2 assets.
> 
> Additionally, I have to express confidence levels put into each view. 
> The higher the level the larger the deviation from its equilibrium 
> weight. Thats my question: Does the tilt from equilibrium necessarily 
> reach its maximum when my confidence is 100% ?? Or may it reach its 
> largest tilt at a lower confidence level? Does not sound intuitive, but 
> my calculations just show that (maximum tilt at 99% confidence to be 
> specific).
> 
> Thanks for your input.
> 
> Regards
> 
> _______________________________________________
> R-SIG-Finance@stat.math.ethz.ch mailing list
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> -- Subscriber-posting only.
> -- If you want to post, subscribe first.

_________________________________________________________________
[[elided Hotmail spam]]

	[[alternative HTML version deleted]]

