Black-Litterman Model

AAA

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.

INVESTOPEDIA 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.

RELATED TERMS
  1. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  2. Black Scholes Model

    A model of price variation over time of financial instruments ...
  3. Black's Model

    A variation of the popular Black-Scholes options pricing model ...
  4. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments ...
  6. Harry Markowitz

    A Nobel Memorial Prize winning economist who devised the modern ...
Related Articles
  1. Volatility - The Birth Of A New Asset ...
    Options & Futures

    Volatility - The Birth Of A New Asset ...

  2. The Capital Asset Pricing Model: An ...
    Fundamental Analysis

    The Capital Asset Pricing Model: An ...

  3. Understanding Option Pricing
    Options & Futures

    Understanding Option Pricing

  4. Unpredictable Event Or Bad Investment?
    Bonds & Fixed Income

    Unpredictable Event Or Bad Investment?

comments powered by Disqus
Hot Definitions
  1. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
  6. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
Trading Center