DEFINITION of 'BlackLitterman Model'
An asset allocation model that was developed by Fischer Black and Robert Litterman of Goldman Sachs. The BlackLitterman model is essentially a combination of two main theories of modern portfolio theory, the Capital Asset Pricing Model (CAPM) and Harry Markowitz's meanvariance optimization theory.
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BREAKING DOWN 'BlackLitterman Model'
The main benefit of the BlackLitterman model is that it allows the portfolio manager to use it as a tool for producing a set of expected returns within the meanvariance optimization framework. This can allow the manager to avoid certain problems or issues inherent in Markowitz's meanvariance optimization framework, such as the concentration of portfolio assets in only a handful of the assets under optimization.
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