Stable Distributions in the Black-Litterman Approach to Asset Allocation

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373

T HE MEAN-VARIANCE MODEL FOR PORTFOLIO management as formulated by Markowitz(1952) is probably one of the most known and cited financial models. Despite its introduction in 1952, there are several reasons cited by academics and practitioners as to

why its use is not more widespread. Some of the major reasons are the scarcity of

diversification, see Green and Hollifield 1992, or highly concentrated portfolios and

the sensitivity of the solution to inputs (especially to estimation errors of the mean, see

Kallberg and Ziemba 1981, 1984, Michaud 1989, and Best and Grauer 1991) and the

approximation errors in the solution of the maximization problem.