Black–litterman model
Starts from the returns implied by reverse optimisation and blends in the investor's own views, each weighted by the confidence placed in it. The allocations stay closer to market weights than unconstrained optimisation gives.
Where you will meet it
Black–litterman model appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain how mean–variance optimisation is used to set an asset allocation and assess its strengths and weaknesses
“Remedies include reverse optimisation, Black–Litterman views, resampling, and sensible constraints.”
- Propose and defend an asset allocation that uses the global market portfolio as its reference point
“Reverse optimisation gives implied equilibrium returns consistent with those weights, Π = λ × Σ × wmkt; Black–Litterman then blends in the investor's views with stated confidence, producing tilts rather than extreme bets.”
See also
Practise it
Practise black–litterman model until it is automatic: questions that explain every wrong option.
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