What is the main goal of the Black-Litterman model?

The Black-Litterman model is primarily designed to combine an investor's subjective views with the market's equilibrium returns in order to achieve an optimal asset allocation. This approach helps to enhance the traditional mean-variance optimization by allowing investors to incorporate personal insights about expected returns while also accounting for the market consensus captured in the equilibrium returns.

This combination is beneficial because it addresses the inherent limitations of relying solely on historical data or market assumptions. The model provides a structured framework for expressing views about assets while adjusting for the uncertainty and risk inherent in those views. By doing so, it helps investors to arrive at a more balanced and informed asset allocation strategy, leading to potentially better risk-adjusted returns.

Focusing exclusively on maximizing returns from risky assets does not encompass the broader objective of managing risk and incorporating subjective insights into portfolio construction. Concentrating solely on fixed-income investments overlooks the model’s applicability to a wider range of asset classes. Lastly, while minimizing risk through diversification is a key aspect of portfolio management, the Black-Litterman model uniquely emphasizes the integration of investor views, making it central to its goal of optimizing asset allocation comprehensively.