Answer Happy

b. [5 marks] Suppose that you are performing a portfolio optimization using the Black- Litterman framework. You have a single view, which relates to the absolute expected excess return of one of the stocks in your universe, which is Stock X. The market- capitalization weight for Stock X is 12%, and your optimization uses à = 3 and t = 0.2. The expected excess returns for Stock X in the vector II of market-implied expected excess returns is IIx = 6%, and your view is that this expected excess return is 5.5%. = On the basis of this information, will you have an overweight, neutral or underweight position on Stock X? What can you say about the final portfolio weight of Stock X? Show your calculations and justify your answer. C. [8 marks] In portfolio optimizations, what inputs are needed to compute investor optimal portfolios? Discuss what issues might arise from estimation errors in these inputs, and propose solutions.