I am attempting to construct a portfolio using the step by step Black-Litterman model. My idea is to have a portfolio of, say 10 ETF's (equity based) in one sector and then add some uncorrelated asset such as bonds, real estate ETF.
I am finding it difficult to approach how to calculate my portfolio weights for my equity ETFs and uncorrelated ETF.
My following approuch to start was to do this:
- obtain market caps of ETFs
- calculate the weight of each ETF depending on its index bench mark
I have attempted this but stuck on how to add uncorrelated assets aswell.
Is this the correct approach? Also, any other considerations i need to take into account to obtain my equilibrium weighted portfolio ready for optimization.
Any guidance to weight calculation would be appreciated.