New Formal Description of Expert Views of Black-Litterman Asset Allocation Model

Abstract

The general contribution of this research is the implementation of new

Saving Time in Portfolio Optimization on Financial Markets

“…The efficient frontier has quadratic character but it is not a smooth line [3]. This non-smooth character origins from the existence of non-negative constraints w i ≥ 0, i=1,…,N in problem (11). Hence, the MPT recommends to be defined and solved portfolio problem (11).…”

“…This non-smooth character origins from the existence of non-negative constraints w i ≥ 0, i=1,…,N in problem (11). Hence, the MPT recommends to be defined and solved portfolio problem (11). Because the investors have different ability to undertake risk, the portfolio manager has to estimate the correct value of the "risk aversion" parameter.…”

“…The two types of formalization of expert views is widely mention in references dealing with the BL model [7,10]. A new form of expert views has been developed in [11]. It has been applied a weighted form for the definition of matrix P, where its components can take values different from AE1.…”

“…The interim values of the portfolio return, risk and portfolio weights are stored in working arrays in MATLAB environment. The evaluation step of changing Ψ was chosen Ψ ¼ 0:01 resulting in 100 solutions of problem (11). The graphical presentation of the MV "efficient frontier" is given in Figure 8.…”

“…The coordinates of the market point give the mean market return E M and the market risk σ M . For these market values the market capitalization weights w M are found from the working arrays when problem (11) has been solved in p. 2. The "approximated efficient frontier" is a quadratic curve of the form…”