POW! Bayes: Combining your own views with those of the market
POW! Bayes addresses a number of problems well-known to fund managers, but often neglected by financial theory.
Imagine your task is to allocate assets to a range of individual equity markets - France, Germany, Italy and so on, around the world - BUT
- you have no views on some of these markets
- where you do have a view, it may be not on one market, but on a group of markets, say Europe
- your views may be not absolute but relative (eg Europe to outperform the US by 10% next quarter)
- you hold these views with varying degrees of conviction, some being correlated, some not.
POW! Bayes solves these problems by means of a generalised and improved version of the procedure popularised by Black and Litterman. It combines managers' views with historic or other information in a statistically rigorous manner, in proportion to the degree of certainty with which they are held. Reverse Optimisation is included and can be used as a means of establishing a neutral view, or as an alternative to conventional optimisation.
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