Asset Allocation and MVO -- Reverse optimization

CFA Level III Portfolio Management
#1

So it mentions that with MVO, “asset allocations/outputs are highly sensitive to small changes in inputs and therefore results in estimation error.”

I understand this but not the depths of WHY.

Then reverse optimization it states.

“By anchoring the asset classes weights to the global market portfolio, reverse optimization addresses the issue of MVO’s sensitivity to small differences in expected return estimates”

On the exam I could just state this and get it correct but it would be nice to kind of understand why. When we anchor to the global market portfolio, how does this change the effects of the small differences in expected return estimates?

Thanks

#2

The global market portfolio already includes the sensitive inputs (discount and growth rates). The result is that the sensitive input for the global market portfolio is just the expected return.