PT  - JOURNAL ARTICLE
AU  - Kenneth J. Martin
AU  - Harikumar Sankaran
TI  - Using the Black–Litterman Model: <em>A View on Opinions</em>
AID  - 10.3905/joi.2019.1.075
DP  - 2019 Jan 31
TA  - The Journal of Investing
PG  - 112--122
VI  - 28
IP  - 1
4099  - https://pm-research.com/content/28/1/112.short
4100  - https://pm-research.com/content/28/1/112.full
AB  - 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.TOPICS: Factor-based models, analysis of individual factors/risk premia