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Fully Flexible Views in Multivariate Normal Markets

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  • Attilio Meucci
  • David Ardia
  • Simon Keel

Abstract

The Entropy Pooling approach in Meucci (2008) is a versatile, general framework to process market views in portfolio construction and generalized stress-tests in risk management. Here we present an efficient algorithm to implement Entropy Pooling with fully general views in multivariate normal markets. Then we discuss two applications. First, we use normal Entropy Pooling to estimate a market distribution consistent with the CAPM equilibrium, which improves on the “implied returns” a-la-Black and Litterman (1990) and can be used as the starting point for portfolio construction. Second, we use normal Entropy Pooling to process ranking signals for alpha-generation.

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File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2013/CIRPEE13-11.pdf
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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1311.

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Date of creation: 2013
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Handle: RePEc:lvl:lacicr:1311

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Related research

Keywords: Portfolio construction; tactical allocation; Entropy Pooling; Kullback-Leibler; Black-Litterman; equilibrium prior; portfolios from sorts; ranking; alpha; signals; factor models; risk management;

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