I have the following portfolio of all ETFs:

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I am attempting to apply Black Litterman and on the step of calculating market weights. I have the following questions:

  1. How can I define what index to use as a benchmark? ( Is it the average of all index tracked? and then use that as my market universe)

  2. How can I define what to use as the market weights for this to find the Implied equilibrium returns? (is it just mcap etf/total mcap of all ETF's)

Any formulas for the above questions would be great. Thanks in Advance

  • $\begingroup$ This looks like a "final portfolio" designed with specific preferences in mind, not like a broadly diversified market portfolio serving as the starting point for Black Litterman or other optimization procedure. Also there is overlap (eg. VHT and IYH) between some components. Starting point for BL is supposed to be a "broad menu of all available choices", you seem to have already made specific selections (i.e heavy on healthcare, light on every other sector). $\endgroup$
    – nbbo2
    Jan 19, 2021 at 13:58
  • $\begingroup$ You are completely right, The focus is the healthcare industry with some uncorrelated asset to diversify. The use of BL is purely for weight optimization and incorporating the current views on the ETFs. For the index (that captures all ETFs) would you advise using an average of all tracked indexs or a more generic one like S&P500? $\endgroup$
    – Erdos_x
    Jan 19, 2021 at 14:45
  • $\begingroup$ Yes, I suppose the benchmark would be an EW average of these ETFs. That's kind of the "default allocation" if you tell me you want these ETFs and say nothing further about weights. (I don't see how you could use market weights given the overlap, not to mention that VIXM does not have a market weight). $\endgroup$
    – nbbo2
    Jan 19, 2021 at 17:40


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