Deconstructing Black—Litterman: How To Get the Portfolio You Already Knew You Wanted.

  • Michaud R
  • Esch D
  • Michaud R
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The article provides a detailed example of a realistic Black-Litterman analysis and demonstrates the accompanying Markowitz frontiers and inputs which comprise the BL portfolios. It compares BL portfolios with better solutions made with methods that explicitly describe for estimation error. It notes that BL users must be aware of its limitations such as its inability to conceal the instability and estimation error problems of Markowitz mean-variance optimization.

Author-supplied keywords

  • Bayesian theory
  • Black-Litterman
  • FINANCIAL risk management
  • MODERN portfolio theory (Investments)
  • Markowitz optimization
  • Michaud optimization
  • Monte Carlo simulation
  • Portfolio optimization
  • SAMPLING error (Statistics)
  • SIMULATION methods & models
  • asset allocation
  • computational finance
  • estimation error
  • implied returns
  • market equilibrium portfolio
  • unconstrained optimization

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  • Richard O Michaud

  • David N Esch

  • Robert O Michaud

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