A Brief Review of Two Classical Models for Asset Allocating

Abstract

The two most famous models, one is called mean-variance optimization model (in short MVO) which was proposed by Markowiz who won the Nobel prize in 1990 due to his pioneering research in the theory of modern financial economics, and another is named after B-L model proposed by Black-Litterman. This paper introduces the evolution of these two models in asset allocating: MVO model and B-L model. First, the advantages and disadvantages of the two models are described in case of treating a practical investment strategy by the two models being employed. Second, we illustrate that, with a comparison of the mean-variance optimization model, the key ingredients are accurate judgment on the performance and correlation of each asset for Black-Litterman model. Finally, we point out that the Black-Litterman model is not always superior to mean-variance optimization in case of the experiences of an investor are insufficient.