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Propose and defend an asset allocation that uses the global market portfolio as its reference point

CFA® Level III · Asset Allocation · Principles of Asset Allocation · L3.AA.4.d

The idea

Begin with market-capitalisation weights across the investable asset classes, typically global equities and bonds, adding real estate and other assets where accessible. Reverse optimisation gives implied equilibrium returns consistent with those weights, Π = λ × Σ × wmkt; Black–Litterman then blends in the investor's views with stated confidence, producing tilts rather than extreme bets. Adjust the result for client specifics: liabilities, base currency and hedging policy, liquidity needs, taxes and restrictions. Scale the risky portfolio up or down with cash or bonds to match risk tolerance, rather than altering its composition arbitrarily. A good justification explains every material deviation from market weights. The trap is adopting a large home-country overweight without a reason such as currency matching or costs.

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