The Black Litterman model: how to use it

The Black Litterman model was developed in 1990 at Goldman Sachs by Fischer Black and Robert Litterman and published in 1992. It is a sophisticated portfolio construction method that overcomes the problem of unintuitive, highly-concentrated portfolios, input-sensitivity, and estimation error maximization, in applying modern portfolio theory in practice. The model uses a Bayesian approach to combine the subjective views of an investor regarding the expected returns of one or more assets with the market equilibrium vector of expected returns to form a new, mixed estimate of expected returns. The resulting new vector of returns leads to intuitive portfolios with sensible… Continue reading