Global equity allocation with index of economic freedom—A Black-Litterman equilibrium approach

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The purpose of the present study is to examine the impact of Index of Economic Freedom (IEF) in strategic equity allocation process, in ternis of riskreturn efficiency, across 49 countries using the Black-Litterman's Absolute View approach. We have attempted to carry an ex-post comparative risk-return performance analysis of traditional CAPM, the Black-Litterman Equilibrium model and our view based strategy based on Black-Litterman's Absolute View approach to analyse whether our view-based strategy adds significant value to asset allocation or not. Our study has particular relevance to asset allocation strategy, portfolio optimisation and risk minimization in the context of global equity markets. Our findings support that the Black-Litterman model is a more reasonable approach to portfolio optimisation and asset allocation as compared to the traditional CAPM approach. Our asset allocation strategy based on recent changes in the IEF provides highly improved results as compared to the traditional capital asset pricing model and Black-Litterman's equilibriurn implied return model. The IEF contains information on the riskier aspects of markets. Our IEF-led strategy in asset allocation can significantly enhance portfolio return at reduced level of risk, and can be particularly useful in choppy markets or periods.

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Faculty of Business Administration - Simon Fraser University
Thesis type: 
Research Project (M.B.A.)