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SummaryTraditional MPT uses historic returns and the VCV matrix to find optimal portfolio
weights. This can result in unrealistic portfolios. The Black-Litterman approach
uses the market portfolio and the VCV matrix to find the markets expected
returns for each portfolio component. These returns can be adjusted according to
individual opinions about particular assets. The final opinion adjusted returns and
the VCV are used to calculate the Black-Litterman optimal portfolio. The final
portfolio weights are very reasonable, and intuitively since the client has a lower
expectation of US returns, the portfolio contains a short position in US equities.