Black-Litterman Model


DEFINITION of '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.

BREAKING DOWN '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.

  1. Diversification

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  2. Harry Markowitz

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  3. Black Scholes Model

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  4. Modern Portfolio Theory - MPT

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  5. Black's Model

    A variation of the popular Black-Scholes options pricing model ...
  6. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
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