An Improvement of the Global Minimum Variance Portfolio Using a Black-Litterman Approach

34 Pages Posted: 15 May 2016

See all articles by Maximilian Adelmann

Maximilian Adelmann

University of Zurich, Students ; University of Zurich - Department of Business Administration

Date Written: May 12, 2016

Abstract

Asset management companies are constantly searching for portfolio optimization models that are on the one hand clear and intuitive and on the other provide high and reliable returns. This paper presents a modified version of the well-known Black-Litterman portfolio optimization approach. Unlike in the original model, the intuitive global minimum variance (GMV) portfolio serves as the reference portfolio. The introduction of a general rule for investors' views in combination with a simplification of the original Black-Litterman approach facilitates the implementation of the model and enables us to remove so-called dead assets from the GMV portfolio. As an additional advantageous feature our model is only based on variance-covariance estimations, and relative return estimations for our general rule. A numerical application of our modified Black-Litterman model to empirical data sets demonstrates that portfolios based on the model clearly outperform the GMV portfolio and the 1/N portfolio in terms of compound annual returns and out-of-sample Sharpe ratios.

Keywords: Portfolio optimization, Black-Litterman model, global minimum variance portfolio, back-testing, out-of-sample tests

JEL Classification: C61, G11

Suggested Citation

Adelmann, Maximilian, An Improvement of the Global Minimum Variance Portfolio Using a Black-Litterman Approach (May 12, 2016). Available at SSRN: https://ssrn.com/abstract=2779169 or http://dx.doi.org/10.2139/ssrn.2779169

Maximilian Adelmann (Contact Author)

University of Zurich, Students ( email )

Zurich
Switzerland

University of Zurich - Department of Business Administration ( email )

Rämistrasse 71
Zurich, CH-8006
Switzerland

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