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How does the Black-Litterman model integrate investor views and market equilibrium assumptions to refine portfolio allocations?

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Black–Litterman model

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The Black-Litterman model refines portfolio allocations by integrating investor views and market equilibrium assumptions. It extends traditional portfolio selection models to incorporate subjective views of operators, allowing for more intuitive portfolios based on their risk-return behaviors . Additionally, a robust approach using fuzzy logic in the Black-Litterman model optimizes portfolio selection by redefining expected returns and uncertainty matrices, showcasing improved out-of-sample performance . Furthermore, a random forest-based Black-Litterman model generates view vectors based on predicted asset returns and measures uncertainty through a confidence matrix, leading to enhanced portfolio performance in Chinese stock markets . However, caution is advised in specifying views, as the model's sensitivity to view specifications poses challenges in practical applications .

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Open access•Journal Article•DOI Intelligent Black–Litterman Portfolio Optimization Using a Decomposition-Based Multi-Objective DIRECT Algorithm Yidong Chen, Xueying Yang, Zitian Wang, Zhonghua Lu, Xuebin Chi - Show less +4 more 14 Jul 2022-Applied Sciences	The Black-Litterman model in the paper integrates investor views by using a random forest approach to predict asset returns and measure uncertainty, enhancing portfolio performance.
Open access•Journal Article•DOI Risk‐return optimised energy asset allocation in transmission‐distribution system using tangency portfolio and Black–Litterman model J. M., Vivek Mohan, Mini S. Thomas - Show less +2 more 18 May 2023-IET energy systems integration	The Black-Litterman model integrates investor views by adapting to subjective opinions, refining portfolio allocations within acceptable risk-return spaces, enhancing portfolio selection in energy transmission-distribution systems.
Open access•Journal Article•DOI Selección óptima de portafolios usando el modelo Black-Litterman con views difusas Yuly Andrea Franco Gómez, John Freddy Moreno Trujillo, Carlos Andrés Zapata Quimbayo - Show less +2 more 01 Jul 2022-Lecturas de Economía	The Black-Litterman model integrates investor views by redefining expected returns and uncertainty using fuzzy logic, enhancing portfolio optimization beyond traditional mean-variance models.
Journal Article•DOI On the Black–Litterman Model: Learning to Do Better Ren-Raw Chen, Shih-Kuo Yeh, Xiaohu Zhang - Show less +2 more 18 Jun 2022-The journal of financial data science 1 Citations	The Black-Litterman model refines portfolio allocations by incorporating investor views, but its sensitivity to view specification poses challenges in practical application due to the arbitrary nature of views.

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