Black Litterman and Carry: A new approach for asset allocation

Abstract

The Black-Litterman model (BL) enables investors to combine their views regarding the performance of various assets with the market equilibrium. Recently it has been shown that any security’s expected return can be decomposed into its “carry” and its expected price appreciation, where carry can be observed in advance. The purpose of this paper is to exploit Carry like view in the Black Litterman model to make a diversified and customized portfolio.