1
$\begingroup$

I am trying to work out the formula for the posterior mean in Black Litterman's model assuming 100% confidence : mean_posterior

Ref: https://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/BlackLitterman.pdf

(Equation 9).

My problem is that the covariance matrix Sigma of the daily returns i'm using is very small such that when I take the inverse of the required expression the values are exploding...can anyone suggest what to do in such a case?

Thanks!

Improve this question
$\endgroup$
1
  • $\begingroup$ Yes, the daily returns covariance matrix will be small, but that should not necessarily be a problem if all of your inputs are on the same scale ($\Omega$, $\Pi$). It's probably easier to convert everything to an annual scale. $\endgroup$
    – Tim Wilding
    Aug 27, 2018 at 12:14

0

Reset to default

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.