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Using the Black–Litterman Model: A View on Opinions

Kenneth J. Martin and Harikumar Sankaran
The Journal of Investing February 2019, 28 (1) 112-122; DOI: https://doi.org/10.3905/joi.2019.1.075
Kenneth J. Martin
is the Regents Professor of Finance at New Mexico State University in Las Cruces, NM. kjmartin@nmsu.edu
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Harikumar Sankaran
is a professor of finance at New Mexico State University in Las Cruces, NM. sankaran@nmsu.edu
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Abstract

We provide evidence on using the Black–Litterman (1991, 1992) asset allocation model and show that if investors form even partially correct opinions on small-cap and emerging market stocks, portfolio performance would have improved vis-à-vis no opinions. For the period 20006–2011, we show that the Black–Litterman expected returns for large-cap US stocks, the EAFE index, and the Bloomberg Barclays US aggregate bond index are highly correlated with future five-year returns in each of those assets. Expected returns on US small-cap and emerging market stocks have a low correlation with future returns. If an opinion was only partially correct on the latter assets, the resulting portfolios would have outperformed a market-cap-weighted benchmark portfolio. Thus, we conclude that investors may benefit more from investing resources in forming opinions on the future direction of small-cap and emerging market stocks relative to large-cap stocks.

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The Journal of Investing: 28 (1)
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Using the Black–Litterman Model: A View on Opinions
Kenneth J. Martin, Harikumar Sankaran
The Journal of Investing Jan 2019, 28 (1) 112-122; DOI: 10.3905/joi.2019.1.075

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Using the Black–Litterman Model: A View on Opinions
Kenneth J. Martin, Harikumar Sankaran
The Journal of Investing Jan 2019, 28 (1) 112-122; DOI: 10.3905/joi.2019.1.075
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  • Article
    • Abstract
    • ASSET ALLOCATION MODELS
    • DATA, METHODOLOGY, AND ANALYSIS OF ASSET ALLOCATION
    • RESULTS: VIEW ON OPINIONS
    • CONCLUSION
    • ACKNOWLEDGMENT
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