After skimming this section, am I understanding correctly that the only real difference between the two approaches is the BL model uses an index to start and the accompanying weights/returns/covariances, and the investor adjusts these weights and returns by incorporating their own subjective views on each asset class and their confidence in those views?? Whereas MVO is simply starting the process with the analysts expected returns/covariances for each asset class and constructing the efficient frontier, etc.?? Am I understanding this, or missing something fundamental?
Exactly.
Yes.
BL assumes that the market asset allocation is the best , so using an inverse optimization technique you get the expected returns of each asset class , u adjust for specific views and thats it
Ok great, thanks gentlemen.
and the resulting portfolio in BL is more diversified than MVO
Remember the additional step in ‘constrained’ BL vs ‘unconstrained’. Constrained starts with global index then reverse optimises before adjusting weights based on manager views. Unconstrained just adjusts weights directly without the regression analysis step
Also remember that by adjusting with manager’s views, the BL portfolio is not the efficient frontier anymore, but should be close.