Abstract
Financial risks may often lead to significant losses. A reasonable capital management model can prevent financial risks and enhance financial services to the real economy. The Black-Litterman model can reduce risks through asset allocation. This paper uses the Black-Litterman model to construct an enhanced strategy applied to the CSI 500 Index, and selects the backtest from December 1, 2019 to December 1, 2021. Through the strategy backtest, it can be found that: whether it is considered or not Transaction costs, using analysts’ consensus target price as the input point of view of the BL model, can provide excess returns for the index enhancement strategy under relatively stable conditions within the sample interval, and improve the sharpness ratio, information ratio, maximum drawdown, etc. Within the risk-return parameters. 
 
 In order to solve the problem of model instability and extreme values of configuration weights in the first step, this paper adjusts the covariance based on the Leodit-wolf compression estimation, thereby optimizing the exponential enhancement model. The backtest results showed that although the volatility and maximum drawdown of the optimized enhanced index model increased slightly, it showed a higher excess return rate and information ratio. Therefore, the BL model optimized based on the compression estimation method can make the model applicable to a wider range, and can be extended to large-scale assets and multi-asset allocation, so that investors have more choices in quantitative investment strategies.
Highlights
China's A shares have continued to fluctuate, and the difficulty of investment has increased significantly
Based on the BL index enhancement strategy that considering transaction costs, for repositioning transactions, each transaction cost is increased by two thousandths, assuming that repositioning is carried out every six months
Based on the optimized BL index enhancement strategy considering transaction costs, for repositioning transactions, each transaction cost is increased by two thousandths, assuming that repositioning is carried out every six months
Summary
China's A shares have continued to fluctuate, and the difficulty of investment has increased significantly. In order to study how to obtain profits through reasonable asset allocation in the structured market, an index enhancement strategy can be considered. The index enhancement strategy using the quantitative method can effectively increase the return on the basis of simple passive investment. The main structure of the model is in Black&Litterman (1990) has been fully explained, but the setting of its parameters has not yet reached a consensus. It is the flexibility of this model setting that gives the BL model the possibility of multiple financial scenarios, and it can be optimized by adding other models and parameter settings. Vol 15, No 2; 2022 compression estimation method and the improved reference setting method, so that it can be applied to exponential enhancement scenarios and can be promoted
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