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Multi-Asset Portfolio Optimization and Out-of-Sample Performance: An Evaluation of Black-Litterman, Mean Variance and Naïve Diversification Approaches

European Journal of Finance, Forthcoming.

48 Pages Posted: 12 Jun 2012 Last revised: 6 Dec 2014

Wolfgang Bessler

Justus-Liebig-University Giessen

Heiko Opfer

Deka Investment GmbH

Dominik Wolff

Deka Investment GmbH; University of Giessen; IQ-KAP

Date Written: December 2014

Abstract

The Black-Litterman model aims to enhance asset allocation decisions by overcoming the problems of mean-variance portfolio optimization. We propose a sample based version of the Black-Litterman model and implement it on a multi-asset portfolio consisting of global stocks, bonds, and commodity indices, covering the period from January 1993 to December 2011. We test its out-of-sample performance relative to other asset allocation models and find that Black-Litterman optimized portfolios significantly outperform naïve-diversified portfolios (1/N-rule and strategic weights), and consistently perform better than mean-variance, Bayes-Stein, and minimum-variance strategies in terms of out-of-sample Sharpe ratios, even after controlling for different levels of risk aversion, investment constraints, and transaction costs. The BL model generates portfolios with lower risk, less extreme asset allocations, and higher diversification across asset classes. Sensitivity analyses indicate that these advantages are due to more stable mixed return estimates that incorporate the reliability of return predictions, smaller estimation errors, and lower turnover.

Keywords: Portfolio Optimization, Black-Litterman, Mean-Variance, Minimum Variance, Bayes-Stein, Naïve diversification, 1/N, Markowitz

JEL Classification: C61, G11

Suggested Citation

Bessler, Wolfgang and Opfer, Heiko and Wolff, Dominik, Multi-Asset Portfolio Optimization and Out-of-Sample Performance: An Evaluation of Black-Litterman, Mean Variance and Naïve Diversification Approaches (December 2014). European Journal of Finance, Forthcoming.. Available at SSRN: https://ssrn.com/abstract=2081636 or http://dx.doi.org/10.2139/ssrn.2081636

Wolfgang Bessler (Contact Author)

Justus-Liebig-University Giessen ( email )

Center for Finance and Banking
Licher Strasse 74
Giessen, D-35394
Germany
49-641-9922460 (Phone)
49-641-9922469 (Fax)

HOME PAGE: http://wiwi.uni-giessen.de/home/Bessler/

Heiko Opfer

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

Dominik Wolff

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

University of Giessen ( email )

Goethestraße 58
Giessen, 35390
Germany

IQ-KAP ( email )

Frankfurt am Main
Germany

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