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2. [6 marks] In Simpleland, there are only two risky assets in the market, Stock and Bond. The information and CAPM estimates of A and B are shown in the following table: A B 100 Trillion 300 Trillion 0.09 0.01 Market Capitalisation ($) Variance (62) Correlation of A and B Expected Return on Market Risk free rate 0.2 20% 10% The manager believes that in the near future, B will outperform A by 10% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the above CAPM model in terms of variance to be 0.01, i.e. t = 0.01. a) What is the average risk aversion index of the market? [3] b) Express the portfolio manager's view in mathematical form for Black-Litterman Model estimation. [3] 2. [6 marks] In Simpleland, there are only two risky assets in the market, Stock and Bond. The information and CAPM estimates of A and B are shown in the following table: A B 100 Trillion 300 Trillion 0.09 0.01 Market Capitalisation ($) Variance (62) Correlation of A and B Expected Return on Market Risk free rate 0.2 20% 10% The manager believes that in the near future, B will outperform A by 10% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the above CAPM model in terms of variance to be 0.01, i.e. t = 0.01. a) What is the average risk aversion index of the market? [3] b) Express the portfolio manager's view in mathematical form for Black-Litterman Model estimation. [3]

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