Explain the process of finding the optimal weight

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1. Briefly explain the process of finding the optimal weight of various asset classes in a portfolio when you use the modern portfolio theory.

2. Let's assume that you set up a portfolio optimization problem, and the only constraint is that the sum of weights is one. Solver selected a large weight for one asset and a large negative weight for another asset. What exactly in your raw data could explain these extreme weights? How would you fix that?

3. Suppose that you are using the Black-Litterman model for asset allocation. Your final weights are very different from market weights? Describe two potential reasons for the result. Which parameters in the model could bring your final weights closer to market weights?

Reference no: EM132726432

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