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.
INVESTOPEDIA EXPLAINS '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.
RELATED TERMS

Diversification
A risk management technique that mixes a wide variety of investments ... 
Harry Markowitz
A Nobel Memorial Prize winning economist who devised the modern ... 
Black's Model
A variation of the popular BlackScholes options pricing model ... 
Modern Portfolio Theory  MPT
A theory on how riskaverse investors can construct portfolios ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Black Scholes Model
A model of price variation over time of financial instruments ...
RELATED FAQS

What techniques are most useful for hedging exposure to the banking sector?
The banking sector moves in the same direction as the broader market, but its volatility is much lower. The sector's stability ... Read Full Answer >> 
What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?
The parametric method, also known as the variancecovariance method, is a risk management technique for calculating the value ... Read Full Answer >> 
During what stage of the economic cycle should I invest in the drugs sector?
Invest in the drugs sector during the expansionary stage of the economic cycle, when the broader market is rising. The absolute ... Read Full Answer >> 
What is backtesting in Value at Risk (VaR)?
The value at risk is a statistical risk management technique that monitors and quantifies the risk level associated with ... Read Full Answer >> 
How much variance should an investor have in an indexed fund?
An investor should have as much variance in an indexed fund as he is comfortable with. Variance is the measure of the spread ... Read Full Answer >> 
How do I discount Free Cash Flow to the Firm (FCFF)?
Discounted free cash flow for the firm (FCFF) should be equal to all of the cash inflows and outflows, adjusted to present ... Read Full Answer >>
Related Articles

Options & Futures
Volatility  The Birth Of A New Asset Class
Learn more about the trading possibilities with the VIX. 
Fundamental Analysis
The Capital Asset Pricing Model: An Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Options & Futures
Understanding Option Pricing
Take advantage of stock movements by getting to know these derivatives. 
Fundamental Analysis
Explaining Expected Return
The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome. 
Economics
Understanding the Fisher Effect
The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. 
Fundamental Analysis
Explaining the Geometric Mean
The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio. 
Mutual Funds & ETFs
U.S. Investors Are Seeking Opportunities Overseas
A latest analysis leads to believe that many investors are applying a spring cleaning approach to their portfolios, rebalancing as the 1st quarter ended. 
Investing
Three Portfolio Moves To Consider Now
What portfolio moves should you consider making as the 2nd quarter kicks off? Before we focus on the future, let’s first reflect on the 1st Q surprises. 
Investing Basics
Manage Investments And Modern Portfolio Theory
Modern Portfolio Theory suggests a static allocation which could be detrimental in declining markets, making it necessary for continuous risk assessment. Downside risk protection may not be the ... 
Mutual Funds & ETFs
Is Amazon a Prime Pick for Your Portfolio?
Eyeing Amazon? Thanks to innovation and diversification, it has high odds of being a longterm winner. Here's why.