Furthermore, the investor can control how strongly a particular view influences portfolio weights, in accordance with the degree of confidence with which he holds the view. If the investor does have one or more views about the relative performances of assets, or their absolute performances, he can adjust equilibrium values in accordance with those views. If the investor has no particular views about asset returns, he can use the neutral values given by the equilibrium model. This set of neutral weights can then be tilted in accordance with the investor's views. And that in a nutshell is portfolio optimization For a given level of risk, we want to maximize our portfolio’s probability of earning a positive return. In particular, equilibrium returns for equities, bonds and currencies provide neutral starting points for estimating the set of expected excess returns needed to drive the portfolio optimization process. Consideration of the global CAPM equilibrium can significantly improve the usefulness of these models. Mean-Variance Optimization This is the famous Markovitz Portfolio. A good part of the problem is that such models are difficult to use and tend to result in portfolios that are badly behaved. Quantitative asset allocation models have not played the important role they should in global portfolio management.
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