Black-Litterman Approach

CFA Level III Portfolio Management
#1

Hi guys,

the premise of the Black-Litterman Approach is to find a global index from which to derive asset classes weights. The example of the MSCI World is taken. To my knowledge, the MSCI World is solely composed of equities. How is one then able to derive, with this approach, the weights one should apply to Real Estate, Fixed Income, Municipals, etc.?

Even by using various indices, I do not see how we can come up with weights in the different asset classes…

Can somebody provide insigt into this cause it is not clear…

Thanks!

#2

As you say, MSCI World is equity only. In theory you can combine that with other cap-weighted indices to get relative weights on all asset classes of interest. I’ve never bothered, but it doesn’t seem all that difficult.

But, for the exam, you can assume that that’s been done. You just need to know what to do with that information.