What is Black-Litterman Model?
An asset allocation model that was developed by Fischer Black and Robert Litterman of Goldman Sachs. The Black-Litterman model is essentially a combination of two main theories of modern portfolio theory, the Capital Asset Pricing Model (CAPM) and Harry Markowitz’s mean-variance optimization theory. Read more for examples and further explanation including related video clips and also comments
Example explains Black-Litterman Model
The main benefit of the Black-Litterman model is that it allows the portfolio manager to use it as a tool for producing a set of expected returns within the mean-variance optimization framework. This can allow the manager to avoid certain problems or issues inherent in Markowitz’s mean-variance optimization framework, such as the concentration of portfolio assets in only a handful of the assets under optimization.
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