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The Journal of Portfolio Management

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Article

The Black–Litterman Model for Active Portfolio Management

Alexandre S Da Silva, Wai Lee and Bobby Pornrojnangkool
The Journal of Portfolio Management Winter 2009, 35 (2) 61-70; DOI: https://doi.org/10.3905/JPM.2009.35.2.061
Alexandre S Da Silva
is a vice president in the Quantitative Investment Group at Neuberger Berman in New York, NY.
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  • For correspondence: alexandre.dasilva@nb.com
Wai Lee
is the chief investment officer and head of the Quantitative Investment Group at Neuberger Berman in New York, NY.
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  • For correspondence: wai.lee@nb.com
Bobby Pornrojnangkool
is a vice president in the Quantitative Investment Group at Neuberger Berman in New York, NY.
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  • For correspondence: bobby.pornrojnangkool@nb.com
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Abstract

Portfolio optimization presents a challenge to investors through the tendency of small differences in expected return inputs to create major swings in portfolio weightings, sometimes leading to extreme portfolio allocations. The authors believe that the Black–Litterman (BL) model can play a highly constructive role in alleviating this problem for investors, because the model combines active investment views and equilibrium views through a Bayesian approach. So that investors can fully exploit this important investment model, the authors discuss the development of the BL model within the mean-variance portfolio efficiency paradigm, examine the phenomenon of unintentional trades and additional risks related to the traditional implementation of BL in active portfolio management, and propose a potential remedy that leads to portable alpha implementation of active portfolios.

  • © 2009 Institutional Investor, Inc.
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The Black–Litterman Model for Active Portfolio Management
Alexandre S Da Silva, Wai Lee, Bobby Pornrojnangkool
The Journal of Portfolio Management Jan 2009, 35 (2) 61-70; DOI: 10.3905/JPM.2009.35.2.061

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The Black–Litterman Model for Active Portfolio Management
Alexandre S Da Silva, Wai Lee, Bobby Pornrojnangkool
The Journal of Portfolio Management Jan 2009, 35 (2) 61-70; DOI: 10.3905/JPM.2009.35.2.061
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  • Article
    • Abstract
    • REVIEW OF BLACK–LITTERMAN FRAMEWORK
    • OPTIMAL ACTIVE MANAGEMENT
    • PROBLEMS OF APPLYING BLACK–LITTERMAN IN ACTIVE MANAGEMENT
    • INFORMATIONLESS VIRTUAL ALPHA
    • BLACK–LITTERMAN MODEL AND ACTIVE MANAGEMENT
    • CONCLUSION
    • ENDNOTE
    • REFERENCES
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