A Step-By-Step Guide to the Black-Litterman Model Incorporating User-specified Confidence Levels

34 Pages Posted: 12 Nov 2019

Date Written: November 3, 2019

Abstract

The Black-Litterman model enables investors to combine their unique views regarding the performance of various assets with the market equilibrium in a manner that results in intuitive, diversified portfolios. This paper consolidates insights from the relatively few works on the model and provides step-by-step instructions that enable the reader to implement this complex model. A new method for controlling the tilts and the final portfolio weights caused by views is introduced. The new method asserts that the magnitude of the tilts should be controlled by the user-specified confidence level based on an intuitive 0% to 100% confidence level. This is an intuitive technique for specifying one of most abstract mathematical parameters of the Black-Litterman model.

Suggested Citation

Idzorek, Thomas, A Step-By-Step Guide to the Black-Litterman Model Incorporating User-specified Confidence Levels (November 3, 2019). Available at SSRN: https://ssrn.com/abstract=3479867 or http://dx.doi.org/10.2139/ssrn.3479867

Thomas Idzorek (Contact Author)

Morningstar Investment Management ( email )

22 W Washington Street
Chicago, IL 60602
United States

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