The Black-Litterman approach to return estimation overcomes the problems associated with estimating expected returns via historical averages by determining the equilibrium returns implied by the Capital Asset Pricing Model (CAPM).
The CAPM explains the return on an asset as a function of the risk premium offered by the market only. The market here is, in theory, an index of all investable securities but broad indices are often used.
Many of the canonical sources on Black Litterman use in their example not individual assets (like equities) but abstract "regions", implying the use of regionally distinct broad-based index funds.
My question is the following: Is the CAPM (to the extent that it is suitable for, e.g., equities) suitable for estimating the equilibrium expected returns of regional equity and bond index ETFs relative to a self-built global securities market index, comprising, for example the following:
- 65% MSCI All Country World Index,
- 15% Citigroup World Government Bond Ex-US Index,
- 15% Citigroup US Government Bond Index,
- 3% Merrill Lynch US High Yield Cash Pay Constrained Index,
- 2% JP Morgan (EMBI) Emerging Markets Bond Index Global?
Is a $\beta$ calculated for regional and asset class-specific ETFs relative to the performance of such an index meaningful and are there any known applications of such a method? What are some potential problems I should think of before constructing such an index?