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Published in:
2022 | OriginalPaper | Chapter
6. Black–Litterman Optimization Results
Authors : W. Brent Lindquist, Svetlozar T. Rachev, Yuan Hu, Abootaleb Shirvani
Published in: Advanced REIT Portfolio Optimization
Publisher: Springer International Publishing
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Abstract
The Black–Litterman model was designed to mitigate issues of input sensitivity and estimation error maximization by using a Bayesian approach to incorporate the returns of a market index. It also incorporates the ability to include subjective views based on investment analyst estimates. As subjective views are specific to the market day and the analyst, the exploration of this model in this chapter is restricted to incorporating market equilibrium returns. The performance of Black–Litterman optimized domestic and global REIT portfolios, under long-only investment strategies is compared to the corresponding mean variance optimized counterparts of Chaps. 4 and 5. Reflecting its design, the performance of the Black–Litterman portfolios more closely tracks that of the selected market index than do optimizations that concentrate solely on maximizing the Sharpe ratio.