%0 Journal Article %A Leon Chen %A Zhi Da %A Ernst Schaumburg %T Implementing Black-Litterman Using an Equivalent Formula and Equity Analyst Target Prices %D 2015 %R 10.3905/joi.2015.24.1.034 %J The Journal of Investing %P 34-47 %V 24 %N 1 %X We examine an alternative and equivalent Black and Litterman [1992] formula using classical multivariate analysis, which is easier to interpret and allows more general view formulations than the original formula. Specifically, the equivalent formula provides a more intuitive explanation under the limiting case of deterministic views, and makes it easier to show the resulting optimal portfolio as a combination of the market portfolio and a long–short view portfolio. The equivalent formula also allows for more convenient empirical implementations when views and expected return priors are correlated. We then use a numerical example to illustrate the equivalent formula, and we also implement the formula in an optimal asset-allocation setting, using equity analysts’ 12-month-ahead target price forecasts for the period 1999–2010. We show that the optimal portfolio outperforms the market (S&P 500) and this result is robust across different time periods and model parameter choices.TOPICS: Security analysis and valuation, quantitative methods, portfolio construction %U https://joi.pm-research.com/content/iijinvest/24/1/34.full.pdf