New formal description of expert views of black-litterman asset allocation model

Abstract

The general contribution of this research is the implementation of new formal type of relative view, which has been added to the Black-Litterman Model (BLM) for asset management. It is well known that the BLM integrates both historical data about the assets' returns and subjective views given by experts and investors. Such complicated model is expected to give more realistic assessment about the dynamical behavior of the stock exchanges. The BLM applies both absolute and relative views about the asset returns. The paper proves that the currently applied relative views with equal weights are equivalent to assess the risk of a virtual portfolio with these assets of the view which participate with equal weights. The paper extends this form of views, applying non-equal weights of the assets. This new formal description has been tested on a market, containing ten world known indices for a 10 years period. The calculations which have been provided give benefits to the suggested non-equal weighted form of subjective views. It gives more conservative results and decreases the portfolio risk supporting the same level of returns, provided by the average market behavior.