Fully flexible views: theory and practice

Scenario analysis allows a practitioner to ex-plore the implications for a given portfolio of a set of subjective views on possible market realisations (see, for example, Mina & Xiao, 2001). The ground-breaking approach pioneered by Black & Litterman (1990) generalises scenario analysis by adding uncertainty about the views and the reference risk model. Further generalisations have been proposed in recent years. Qian & Gorman (2001) provide a framework to stress test volatilities and correlation

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