On an adaptive Black–Litterman investment strategy using conditional fundamentalist information: A Brazilian case study

Betina Fernandes, Cristiano Fernandes, Alexandre Street, and Davi Valladão; Finance Research Letters, 2018. [Download PDF]

Abstract: We propose an investment strategy based on the Black–Litterman model with conditional information. We present how observed price-earnings ratio and past returns can be used to determine 1-step ahead returns, considering investors with different risk profiles. The provided approach updates the conditional probability distribution of asset returns and mitigates asset allocation instability due to estimation errors. Our case study using Brazilian data shows the resulting optimal portfolios outperform traditional mean-variance portfolios even in an emerging market with one of the highest nominal interest rates.