An Empirical Evaluation of the Black-Litterman Approach to Portfolio Choice

37 Pages Posted: 12 Mar 2011 Last revised: 26 Oct 2012

See all articles by Michael Gofman

Michael Gofman

Simon School of Business

Asaf Manela

Washington University in St. Louis - John M. Olin Business School

Date Written: October 18, 2012

Abstract

We evaluate the Black-Litterman equilibrium model approach to portfolio choice. We quantify the improvement in portfolio performance of a privately informed investor who learns from market prices over an equally informed, but dogmatic investor who only uses private information. We extend the approach to any linear multi-factor asset pricing model (e.g. ICAPM) to examine how learning from prices using different equilibrium models affects portfolio performance. We find that even a misspecified asset-pricing model can improve portfolio performance when private signals are not extremely precise. As we increase the noise in private information, learning from prices is initially harmful and gradually becomes more beneficial.

Keywords: Bayesian portfolio choice, learning from prices, Black-Litterman

JEL Classification: G11, D83

Suggested Citation

Gofman, Michael and Manela, Asaf, An Empirical Evaluation of the Black-Litterman Approach to Portfolio Choice (October 18, 2012). Available at SSRN: https://ssrn.com/abstract=1782033 or http://dx.doi.org/10.2139/ssrn.1782033

Michael Gofman

Simon School of Business ( email )

Rochester, NY 14627
United States

HOME PAGE: http://gofman.info

Asaf Manela (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-9178 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/manela

Register to save articles to
your library

Register

Paper statistics

Downloads
348
Abstract Views
1,287
rank
84,507
PlumX Metrics