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!


1 Answer 1


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.

  • $\begingroup$ "your" risk aversion variable or "the markets'" risk aversion variable? $\endgroup$
    – Alex C
    Mar 12, 2019 at 1:51
  • $\begingroup$ 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 $\endgroup$
    – numerairX
    Mar 12, 2019 at 3:19

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