Black-Litterman Potfolio Optimisation: An Application to the German and Swiss Stock Market

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Reference

Kaiser, L. (2011). Black-Litterman Potfolio Optimisation: An Application to the German and Swiss Stock Market. Paper presented at the Value Day 2011, Dornbirn (Austria).

Publication type

Refereed Conference Paper

Abstract

This paper investigates the well known Black-Litterman approach for portfolio optimisation with the declared goal to overcome short-comings of mean-variance optimisation and define the optimal adjustment parameters. The empirical part of this paper incorporates a comparison between model at hand and various classical portfolio structures within the framework of the DAX30 and SMI20 composites. The individual views for the tactical allocation are represented by analyst recommendations of the type consensus estimate, which allows the author to focus on the original model and its parameters. The results show that the Black-Litterman approach is able to overcome the vast majority of short-comings associated with mean-variance optimization, while keeping the performance, in terms of a risk-return relationship, very competitive for the sample period. At the same time the sensible parameter adjustments offer helpful indications for financial service providers active on the German and/or Swiss markets.

Persons

Organizational Units

  • Institute for Financial Services
  • Chair in Business Administration, Banking and Financial Management