Black-Litterman AO approach

[RoccoLee]

Why “the global market equilibrium portfolio is the default strategic asset allocation for the Black-Litterman AO approach”?

 

[MrSmart]

It’s a global SAA approach, and it uses the market cap-weighted portfolio as its starting point. Capital flows between countries and their asset classes should provide the best estimate for current prices and returns, unless the investor has specific views on what will outperform on the short term.

 

[RoccoLee]

MrSmart wrote:
It’s a global SAA approach, and it uses the market cap-weighted portfolio as it’s starting point. Capital flows between countries and their asset classes should provide the best estimate for current prices and returns, unless the investor has specific views on what will outperform on the short term.

Still confused about that. Could you elaborate more based on the statement quoted, please?

 

[S666]

It just looks at things from the other way around…instead of starting off with your capital market expectations and saying “from these expectations, what weighting should I give to each asset class?”, it’s actually starts with the real market-cap weighted portfolio that replicates the market weighting of each real life available asset class…and then works backwards to incorporate and develop your capital market expectations. I guess it kind of assumes that “the market” has it right, and the underlying correct capital market expectations are already incorporated into the real market weightings.