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The Intuition Behind Black-Litterman Model Portfolios

Guangliang He


Robert Litterman

Kepos Capital

In this article we demonstrate that the optimal portfolios generated by the Black-Litterman asset allocation model have a very simple, intuitive property. The unconstrained optimal portfolio in the Black-Litterman model is the scaled market equilibrium portfolio (reflecting the uncertainty in the equilibrium expected returns) plus a weighted sum of portfolios representing the investor's views. The weight on a portfolio representing a view is positive when the view is more bullish than the one implied by the equilibrium and the other views. The weight increases as the investor becomes more bullish on the view, and the magnitude of the weight also increases as the investor becomes more confident about the view.

Number of Pages in PDF File: 27

Keywords: Baysian, Black-Litterman model, CAPM, mean-variance analysis, portfolio selection

JEL Classification: C11, C61

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Date posted: October 28, 2002  

Suggested Citation

He, Guangliang and Litterman, Robert, The Intuition Behind Black-Litterman Model Portfolios. Available at SSRN: https://ssrn.com/abstract=334304 or http://dx.doi.org/10.2139/ssrn.334304

Contact Information

Guangliang He (Contact Author)
Independent ( email )
No Address Available
Robert Litterman
Kepos Capital
620 Eighth Avenue
New York, NY 10018
United States
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