Background Note | HBS Case Collection | November 2007

Bayesian Estimation & Black-Litterman

by Joshua D. Coval and Erik Stafford

Abstract

Describes a practical method for asset allocation that is more robust to estimation errors than the traditional implementation of mean-variance optimization with sample means and covariances. The Bayesian inspired Black-Litterman model is described after introducing the intuition of the Bayesian approach to inference in a univariate setting.

Keywords: Asset Management; Investment Portfolio; Mathematical Methods;

Citation:

Coval, Joshua D., and Erik Stafford. "Bayesian Estimation & Black-Litterman." Harvard Business School Background Note 208-085, November 2007.