Extending Black-Litterman Analysis Beyond the Mean-Variance Framework

Lionel Martellini

60 citations0/0 files storedThe Journal of Portfolio Management

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Risk and Portfolio Optimization Financial Markets and Investment Strategies Financial Risk and Volatility Modeling

Abstract

Extension of the Black-Litterman Bayesian approach to portfolio construction in the presence of non-trivial preferences about higher moments of asset return distributions has a particular application to active style allocation decisions in hedge fund investing. Results here suggest that the systematic implementation of active style allocation decisions can add significant value in a hedge fund portfolio, provided implementation of a sound investment process to account for non-normality and parameter uncertainty in hedge fund return distributions. TOPICS: VAR and use of alternative risk measures of trading risk , portfolio construction

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1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1952Portfolio Selection 1989Business conditions and expected returns on stocks and bonds 1988Stock Prices, Earnings, and Expected Dividends 1985Stock Returns and the Term Structure 1992Global Portfolio Optimization

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