Black-Litterman
TheoryDefinition
Portfolio-construction framework (1990) that combines market-implied equilibrium returns (Bayesian prior) with the investor's own views (likelihood) to produce stable, intuitive portfolio allocations.
Solves the "garbage-in-garbage-out" problem of Markowitz mean-variance optimization (small return-input changes → wildly different portfolios). Used by most institutional asset managers for SAA and TAA decisions.
Solves the "garbage-in-garbage-out" problem of Markowitz mean-variance optimization (small return-input changes → wildly different portfolios). Used by most institutional asset managers for SAA and TAA decisions.