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Quantitative forecast model for the application of the Black-Litterman approach
[working paper]
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Technische Universität Braunschweig, Department Wirtschaftswissenschaften, Institut für Finanzwirtschaft
Abstract "The estimation of expected security returns is one of the major tasks for the practical implementation of the Markowitz portfolio optimization. Against this background, in 1992 Black and Litterman developed an approach based on (theoretically established) expected equilibrium returns which accounts... view more
"The estimation of expected security returns is one of the major tasks for the practical implementation of the Markowitz portfolio optimization. Against this background, in 1992 Black and Litterman developed an approach based on (theoretically established) expected equilibrium returns which accounts for subjective investors’ views as well. In contrast to historical estimated returns, which lead to extreme asset weights within the Markowitz optimization, the Black-Litterman model generally results in balanced portfolio weights. However, the existence of investors’ views is crucial for the Black- Litterman model and with absent views no active portfolio management is possible. Moreover, problems with the implementation of the model arise, as analysts’ forecasts are typically not available in the way they are needed for the Black-Litterman-approach. In this context we present how analysts’ dividend forecasts can be used to determine an a-priori-estimation of the expected returns and how they can be integrated into the Black-Litterman model. For this purpose, confidences of the investors’ views are determined from the number of analysts’ forecasts as well as from a Monte-Carlo simulation. After introducing our two methods of view generation, we examine the effects of the Black-Litterman approach on portfolio weights in an empirical study. Finally, the perfor-mance of the Black-Litterman model is compared to alternative portfolio allocation strategies in an out-of-sample study." (author's abstract)... view less
Keywords
interest rate; equity; capital; management; return
Classification
Financial Planning, Accountancy
Free Keywords
analysts’ earnings forecasts; discount rate effect; equity premium puzzle; implied rate of return
Document language
English
Publication Year
2008
City
Braunschweig
Page/Pages
28 p.
Series
IF Working Paper Series, IF27V2
Handle
https://hdl.handle.net/10419/55228
Status
reviewed
Licence
Deposit Licence - No Redistribution, No Modifications
Data providerThis metadata entry was indexed by the Special Subject Collection Social Sciences, USB Cologne