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.