Black-Litterman Model

The Black-Litterman model is the mad-scientist creation of two Goldman Sachs dudes, combining three things: 1. the modern portfolio theory (basically: having a balanced portfolio that protects you from too much risk while still maximizing returns), 2. the capital asset pricing model (bases pricing of investments on risk-level and time invested), and 3. the mean-variance optimization theory (maximizing your portfolio for the be$t return$).

Say what now?

Basically, the Black-Litterman model helped portfolio managers solve the balancing-act problem many of them had, allowing them to produce a reasonable estimate of expected returns within a balanced portfolio that’s also optimized for maximum money-making.

It’s a tool that gave them the best of both worlds (balanced portfolio and risk/time-based pricing of investments).

Make it rain, boys.