@article {Chen34, author = {Leon Chen and Zhi Da and Ernst Schaumburg}, title = {Implementing Black-Litterman Using an Equivalent Formula and Equity Analyst Target Prices}, volume = {24}, number = {1}, pages = {34--47}, year = {2015}, doi = {10.3905/joi.2015.24.1.034}, publisher = {Institutional Investor Journals Umbrella}, abstract = {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{\textendash}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{\textquoteright} 12-month-ahead target price forecasts for the period 1999{\textendash}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}, issn = {1068-0896}, URL = {https://joi.pm-research.com/content/24/1/34}, eprint = {https://joi.pm-research.com/content/24/1/34.full.pdf}, journal = {The Journal of Investing} }