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In the Black-Litterman framework views of inverstors on the market are modelled. These views have a covariance-matrix $\Omega$.
I always found it quite natural to model $\Omega$ proportional to the market covaraince $\Sigma$. But in the literature by Litterman himself I find that $\Omega$ should be diagonal. Why should this be useful?
There is no proof in the papers mentioned. I don't think that $\Omega$ has to be diagonal for the framework to work, but why do they assume it? Mabye the proof is in Black, Fischer, and Robert Litterman, Asset Allocation: Combining Investor Views With Market Equilibrium, Goldman, Sachs & Co.,September 1990. But I can't find it on the web.