Black-Litterman Model


A paper on the Black-Litterman Model (Updated May 2nd)

An applet which implements the Black-Litterman model

Black-Litterman Model

This applet lets you play with the methodology, and you can also enter your own market data either by typing it in, or by dragging and dropping from a spreadsheet. The format is a bit rigid, but it works. The default market equilibrium comes from the He-Litterman paper. Of course you can enter any views you want as well. You can use either the He-Litterman method to compute the view variances, or you can use the Idzorek method to specify the confidence in the view as a percentage. This isn't too clear in the GUI, but I plan on cleaning it up in a future release.

To start, either select the edit>sampling distribution menu option to update the sampling distribution derived from the market capitalization and CAPM (default is from the He-Litterman paper), or just press the Go button. This will bring up the view dialog. Enter one or more views. Enter all values as decimals, not as percent (e.g. 0.03 vs 3%). When done entering views press Ok to run the Black-Litterman model and generate a new posterior estimate of the returns.

If you click on the posterior returns for a specific asset you will see a graph of the prior, equilibrium and posterior distribution for that asset.


Black-Litterman Model Applet

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