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Black-Litterman Model: Practical Asset Allocation Model Beyond Traditional Mean-Variance
Mälardalen University, School of Education, Culture and Communication.
Mälardalen University, School of Education, Culture and Communication.
2016 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

This paper consolidates and compares the applicability and practicality of Black-Litterman model versus traditional Markowitz Mean-Variance model. Although well-known model such as Mean-Variance is academically sound and popular, it is rarely used among asset managers due to its deficiencies. To put the discussion into context we shed light on the improvement made by Fisher Black and Robert Litterman by putting the performance and practicality of both Black- Litterman and Markowitz Mean-Variance models into test. We will illustrate detailed mathematical derivations of how the models are constructed and bring clarity and profound understanding of the intuition behind the models. We generate two different portfolios, composing data from 10-Swedish equities over the course of 10-year period and respectively select 30-days Swedish Treasury Bill as a risk-free rate. The resulting portfolios orientate our discussion towards the better comparison of the performance and applicability of these two models and we will theoretically and geometrically illustrate the differences. Finally, based on extracted results of the performance of both models we demonstrate the superiority and practicality of Black-Litterman model, which in our particular case outperform traditional Mean- Variance model.

Place, publisher, year, edition, pages
2016.
Keyword [en]
Black-Litterman Model Practical Asset Allocation Model Beyond Traditional Mean-Variance Portfolio Theory
National Category
Mathematics Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:mdh:diva-32427OAI: oai:DiVA.org:mdh-32427DiVA: diva2:950588
Subject / course
Mathematics/Applied Mathematics
Presentation
(English)
Supervisors
Examiners
Available from: 2016-08-15 Created: 2016-08-01 Last updated: 2016-08-15Bibliographically approved

Open Access in DiVA

fulltext(755 kB)44 downloads
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