What is Black-Litterman approach ?

Usually for any kind of mean variance analysis, we need to estimate returns and standard deviation. This process results in estimation errors and other ambiguity. Also historical patterns may not repeat in future.
BL approach removes such ambiguity and makes calculation of returns from current market valuations, i.e, implied rate of return. This removes the uncertainty related to estimating returns. After this, finally mean variance analysis is done using this rate of return.
 
Also, it is important to remember that BL also involves adjusting the estimated values based on the analysts views of the current situation.
 
One addition is that the “original” BL does not allow short sales, whereas the “Unconstrained Black-Litterman” does.
 
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