The application of Black-Litterman Bayesian model for the portfolio optimization on the liquid index 45 (LQ45) with information ratio assessment

摘要

Investment is an interesting activity for communities in Indonesia. The aims of investment is to gain a large profit with a low risk. Portfolio formation is one of the option to minimize risks and optimize investment returns. One of the portfolio optimization models is the Black-Litterman model. The concept on Black-Litterman model enebles investors to combine their unique views regarding the performance of various assets with the market equilibrium from Capital Asset Pricing Model (CAPM). The Black-Litterman model uses a Bayesian approach. this research results, the optimal portfolio of the Black-Litterman model on the LQ45 index consists of ICBP, TLKM, CTRA, ITMG, and BBCA stocks. The stock with the largest investment weight is ICBP, which is 89.69% and the smallest investment weight is BBCA, which is 4.03%. The optimal portfolio of the Black-Litterman model with 3 views consisting of 2 relative views and 1 absolute view produces a portfolio return of 5.47% and a portfolio risk of 0.06%. The information ratio value of the Black-Litterman model portfolio is 2.26, It means that the Black-Litterman model produces a greater return than the benchmark (CAPM).