# Black-Litterman risk aversion

I'm trying to better understand how BL works and what I would like to know if there is a way to adjust the portfolio created based on a risk aversion variable determined by the user. I can't really find anything related to this, any help is appreciated!

intuitively BL works as assuming return (can be factor return defined in APT model or return over some interval) follows normal distribution with mean $$E$$ and variance $$V$$, we want to infer such mean and variance based on noisy observations from view about portfolio, and then use mean variance optimization to get the optimal portfolio holding which is just $$(kV[r])^{-1}E[r]$$, $$k$$ being your risk aversion variable. So yes there is a way to adjust the portfolio based on it.
• hmm good question, imho I would say in some ways a combination. One case might be a PM want to construct a portfolio with average holdings to be a certain number and thus $k$ is solved using both market info and his expectation Mar 12 '19 at 3:19