Black-Litterman portfolio optimization for Pakistan stock exchange (PSX) KSE-30 index

Abstract

An optimized portfolio consisting of KSE-30 assets is obtained using the Black-Litterman method for the period from January 2022 to December 2022. The portfolio object has been created by blending financial analysts’ views with the equilibrium returns of the KSE-30 market and the covariance matrix, incorporating the uncertainty estimate of the prior belief of expected returns. It is observed that asset allocation in the optimized portfolio using the Black-Litterman model is strongly influenced by investment views anticipating an increase in asset returns. Furthermore, the use of Black-Litterman model in providing a comprehensive distribution of assets with minimal risk is demonstrated through an example, and the assets with no substantial market impact are removed from the final portfolio.