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I'm running a Black-Litterman model and for the Risk Aversion Coefficient I have two potential formulas.

The first is the standard formula which I believe is used in the original Black-Litterman formula:

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The second is a variation of the first. But this time the variance is multiplied by 2.

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Does anyone know why we would multiply variance by 2, and who is the source? I'm struggling to find one.

As an aside, the second equation provides a more reasonable value for risk aversion with my data than the first. I discovered it in an lecturer's old notes.

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  • $\begingroup$ In some sources, the optimization problem takes the general form $\mu-\lambda\sigma^2$, in others it is $\mu-\frac{1}{2}\lambda\sigma^2$. $\endgroup$ May 17 at 6:45

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