The two-factor Black-Litterman model

Over the years, an increasing number of practitioners have been using the Black-Littermanmodel to make tactical asset allocation decisions. The model generates more stable resultsthan classical mean-variance optimisation and incorporates return forecasts in a consistentmanner. However, it completely characterises risk by volatility, which may not be appropriate forcertain asset classes. Here, Hari Krishnan and Norman Mains rederive the Black-Littermanequation in a two-factor framework that takes long-term recession risk into account

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