A Practical Way to Assess the Confidence Level of a Manager in a Black and Litterman Model

18 Pages Posted: 6 Oct 2011  

Annalisa Beato

affiliation not provided to SSRN

Luca Ercolani

affiliation not provided to SSRN

Tiziano Novelli

affiliation not provided to SSRN

Date Written: September 6, 2011

Abstract

The aim of this paper is to propose an alternative way to determine the well known confidence parameter c in the Black-Litterman (BL) asset allocation model. Starting at t0 and considering a dynamic BL optimization over time we are able to build a manager confidence function that sets the c value upon the manager’s views. We’ll explain that an endogenous confidence parameter solves the old problem to require views to the manager, together with their ex-ante strength. Following this way we attain a BL model with a reduction of manager’s inputs, without losing the benefits of the BL approach.

Keywords: Black Litterman, confidence, asset allocation

Suggested Citation

Beato, Annalisa and Ercolani, Luca and Novelli, Tiziano, A Practical Way to Assess the Confidence Level of a Manager in a Black and Litterman Model (September 6, 2011). Available at SSRN: https://ssrn.com/abstract=1939798 or http://dx.doi.org/10.2139/ssrn.1939798

Annalisa Beato

affiliation not provided to SSRN ( email )

Luca Ercolani

affiliation not provided to SSRN ( email )

Tiziano Novelli (Contact Author)

affiliation not provided to SSRN ( email )

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