Can someone kindly explain Black Litterman model? 照片

bchadwick

So in a mean-variance optimization, to create the efficient frontier you have all these assets and you input all their risk and return characteristics into the model. I think that includes standard deviation, covariances, and returns. Then you weight them differently and create the frontier.

The BL model is the opposite of this, in order to overcome the weakness of having to come up with sensitive estimates of risk and return characteristics. So you take the weights of the assets in a global index and its covariances, then solve for the return. How do you get the return from those inputs?

Thanks

liangfeng

mik82 Wrote:
-------------------------------------------------------
> The B-L model uses mkt equilibrium weights and
> covariance to solve for the expected return.
> However, the formula is not presented in the book.
> I don't know exactly how that's done
> mathematically. Once the expected returns are
> calculated, then they are adjusted to reflect the
> investor's views and the confidence level in those
> views. Lastly, optimization is used to calculate
> asset weights, just like in MV. Can anybody
> correct/enhance my explanation? I have to say that
> the B-L, re-sampling EF and other parts of asset
> allocation are poorly written. So confusing.

this is a very good explanation

bodhisattva

mik82 Wrote:
-------------------------------------------------------
> The B-L model uses mkt equilibrium weights and
> covariance to solve for the expected return.
> However, the formula is not presented in the book.
> I don't know exactly how that's done
> mathematically. Once the expected returns are
> calculated, then they are adjusted to reflect the
> investor's views and the confidence level in those
> views. Lastly, optimization is used to calculate
> asset weights, just like in MV. Can anybody
> correct/enhance my explanation? I have to say that
> the B-L, re-sampling EF and other parts of asset
> allocation are poorly written. So confusing.

You have explained it nicely.

jmh530

Thanks for the replies, cleared up the confusion for me!

lcai

The B-L model uses mkt equilibrium weights and covariance to solve for the expected return. However, the formula is not presented in the book. I don't know exactly how that's done mathematically. Once the expected returns are calculated, then they are adjusted to reflect the investor's views and the confidence level in those views. Lastly, optimization is used to calculate asset weights, just like in MV. Can anybody correct/enhance my explanation? I have to say that the B-L, re-sampling EF and other parts of asset allocation are poorly written. So confusing.