Applying the Black-Litterman Model Using Analyst Recommendations on the Nordic Stock Market

Abstract

In this thesis, we are using consensus stock analyst recommendations which are applied to the Black-Litterman optimization model. We create a portfolio consisting of the Nordic Stock market between 2002 and 2017 to examine whether the analyst recommendations could add value to the model. The stocks in the portfolio are separated into portfolios based on the type of recommendation: “buy”, “hold”, and “sell”, and tracked historically to determine the stocks’ performance relative to the market. The investment period is divided into three investment periods surrounding the Great Recession. The portfolio created from the Black-Litterman model is then compared against benchmarks to determine the raw excess and risk-adjusted returns based on performance measures. The Black- Litterman performed significantly better than the market portfolio before the Great Recession but underperformed in the period afterwards in terms of raw excess and risk-adjusted returns. This suggests that the consensus analyst recommendations may add value in certain situations for the Black-Litterman model separated by the type of rating.