Fully Flexible Views in Multivariate Normal Markets

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-Litterman and can be used as the starting point for portfolio construction. Second, we use normal Entropy Pooling to process ranking signals for alpha-generation.

Number of Pages in PDF File: 12

Keywords: Portfolio Construction, Tactical Allocation, Entropy Pooling, Kullback-Leibler, Black-Litterman, Equilibrium Prior, Portfolios From Sorts, Ranking, Alpha, signals, Factor Models, Risk Management

JEL Classification: C1, G11

working papers series