Bayesian Allocation Framework: Towards Unified Transparent Portfolio Construction

Authors: Cheung, W.

Publisher: SSRN


This article derives a transparent version of the Augmented Black-Litterman (ABL) model (Cheung, 2012) with an explicit allocation expression for all the ABL endogenous strategy combination, factor mimicking, hedging, and stock-specific components. This model not only allows clearer theoretical insights, but also enables more tangible implementation of synthetic strategies in a unified framework. Suppose an investor has some factor, strategy, and/or stock-specific alpha ideas. Without an optimiser, some straightforward linear algebra will give the diversified and efficient Bayesian allocation that allows greater performance accountability. All the investor needs is a factor model.

Source: Manual