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Mathematical Derivations and Practical Implications for the Use of the Black-Litterman Model

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  • Charlotta Mankert
  • Michael Seiler

Abstract

Executive Summary. In this article, the financial portfolio model often referred to as the Black-Litterman model is described, and then mathematically derived, using a sampling theoretical approach. This approach generates a new interpretation of the model and gives an interpretable formula for the mystical parameter, τ, the weight-on-views. The practical implications of the model are discussed, along with how portfolio fund managers should arrive at model input values and what consideration must be weighted beforehand.

Suggested Citation

  • Charlotta Mankert & Michael Seiler, 2011. "Mathematical Derivations and Practical Implications for the Use of the Black-Litterman Model," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 17(2), pages 139-159, January.
    • Handle: RePEc:taf:repmxx:v:17:y:2011:i:2:p:139-159
    DOI: 10.1080/10835547.2011.12089901
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