Application of modified Black-Litterman model for active portfolio management

•Modification of the BL model allows its repetitive application in real time.•Easy generation of expert views from short history of assets’ returns.•The active portfolio management applies sequential usage of the modified BL model.•The modified Black—Litterman and Markowitz solutions can be compared on common basis. An active policy for portfolio optimization is developed based on repetitive application of modified Black-Litterman (BL) portfolio model and new formal definition of the expert views. New subjective views are defined which are based on the differences between the historical mean asset returns and their implied return values. An algorithm for the implementation of active management with the modified BL model is derived. The active management policy allows using short time series of historical data of assets, providing portfolio optimization with limited set of assets. New market point is evaluated, because the small set of assets does not allow market index to be used as characteristics of the market. The new formalization of the expert views allows to be compared the Mean Variance and BL portfolios on common basis. The experiments and comparisons between the Mean Variance optimization and the modified BL problem give advantages to the last one.