The Application of the Black-Litterman model in a Multi-factor Framework

Jesper Christian Salling Nielsen

Student thesis: Master thesis


In this thesis we demonstrate that the optimal portfolios generated by the BlackLitterman asset allocation model have a very simple, intuitive property. We show that the assumptions of the model are not violated when introduced to multiple factor and sector premiums. The Black-Litterman model enables investors to combine their unique views regarding the performance of various assets with the market equilibrium in a way that results in intuitive, well-diversified portfolios. The unconstrained optimal portfolio in the Black-Litterman model is the scaled equilibrium portfolio plus a weighted sum of portfolios representing the investor’s views. The weight on a portfolio representing a view is positive when the view is more bullish than the one implied by the equilibrium and the other views. The weight increases as the investor becomes more bullish on the view, and the magnitude of the weight also increases as the investor becomes more confident about the view. This paper consolidates insights from the relatively few works on the model and provides an extended multifactor framework with step-by-step instructions that enable the reader to implement this model.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2016
Number of pages96