Black Litterman Optimal Portfolio vs Benchmark

[Asimov]

Good Morning,

i've been trying to use BL to optimize an asset allocation benchmark portfolio using as views some technical signals which give me overweight/underweight indications.

Benchmark does not have an allocation on cash which i would like to allow to my portfolio so i "extend the benchmark" with a "0" for cash weight.

I follow the algorithm, computing equilibrium mean returns and inserting the views (expressed as as range of -3 ... 3 standard deviation) and obtaining the new efficient frontier.

To choose the best portfolio i tried to find the one which maximes the Sharpe Ratio that is [Return - risk free]/Volatility.

The mainly inconvenient is that cash allocation results is often too large.

Can anyone give some tips or advice related to the problem? Or maybe some suggestions about different ways of doing a sort of optimized allocations vs benchmark given some buy/sell signals?

Thank you very much!!

 

[daleholborow]

what does "too large" mean?

 

[Asimov]

You are right i have been too vague.
It was a silly way to say "too high to be done in reality"...
i thought immediately to insert some costraints but, before doing that, i wanted to ask here if you have me some smarter tips

 

[samioski]

Asimov could you kindly tell me how you found the market capitalization of every asset class to create the neutral starting point? thanks!

 

[IntoDarkness]

Asimov could you kindly tell me how you found the market capitalization of every asset class to create the neutral starting point? thanks!

probably not possible

 

[Asimov]

i did not use market capitalization to compute the neutral starting point but the benchmark's weights

 

[mr_elk]

Which kind of asset classes do you have in your benchmark? Do you use an equity benchmark? I'm wondering how to find all the market caps when you use a portfolio consisting of equity and bonds. For single stocks market cap is no issue. But I would like to build a portfolio based on ETFs. ETFs on stocks might also work (although a bit more complicated to find) as I found some market cap numbers for stock indices. But for bond ETFs I was not able to find a total market cap. Any ideas how to find such data? Or how to circumvent the issue with finding market caps for all ETFs/Indizes?

 

[Asimov]

Which kind of asset classes do you have in your benchmark? Do you use an equity benchmark? I'm wondering how to find all the market caps when you use a portfolio consisting of equity and bonds. For single stocks market cap is no issue. But I would like to build a portfolio based on ETFs. ETFs on stocks might also work (although a bit more complicated to find) as I found some market cap numbers for stock indices. But for bond ETFs I was not able to find a total market cap. Any ideas how to find such data? Or how to circumvent the issue with finding market caps for all ETFs/Indizes?

I used classical asset classes like North America Equities, European Equities, Emerging Equities, Global Gov. Bonds, Emu Gov. Bonds, Global High Yield, Euro High Yield, Commodities...
As i said before i did not use market cap to compute equilibrium weights but benchmarks weights