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Chapter 36. Incorporating Trading Strate... > THE BLACK-LITTERMAN MODEL

36.2. THE BLACK-LITTERMAN MODEL

In this section we provide a simple derivation of the Black-Litterman model. We have divided the exposition into three steps: basic assumptions and starting point, expressing an investor's views, and combining an investor's views with market equilibrium.

36.2.1. Step 1: Basic Assumptions and Starting Point

One of the basic assumptions underlying the Black-Litterman model is that the expected return of a security should be consistent with market equilibrium unless the investor has a specific view on the security. In other words, an investor who does not have any views on the market should hold the market.


  

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