The Black Litterman Model For Portfolio Optimization

Abstract

In this thesis we exploit the Black-Litterman model to practice on the Vietnam stock market that using historical price data over 5-year period from January 2015 to October 2019. The model allows investors to express their subjective opinions or views on one or several assets in order to get closer to an optimal allocation model, that supports investors to better manage investment portfolios. Therefore, to determine these views, time series analysis and forecasting were used to analyze and predict the value of views to feed into the model. Also, the traditional method - Markowitz model will be used for comparison purposes in both a restricted and an unrestricted version so as to test differences in outcome when short selling is allowed. Then, we will discuss the implications of above mentioned approaches and show differences between them to give the results why the Black-Litterman model operates intuitively and is undoubtedly an upgrade to Markowitz method.