This post is about the Black-Litterman (BL) model for asset allocation and the basis of my talk at the Dublin Data Science Meet-up. The original BL paper (Black and Litterman (1991)) is over 30 years old and builds on the ideas of modern portfolio theory by Harry Markowitz (Markowitz (1952)). A good introduction to the BL model is (Idzorek (2005)) or (Maggiar (2009)).
I am not sure how much the model is used by investment professionals, as many of the underlying assumptions may not hold true in the real world.

Following on from last week, where I presented a simple example of a Bayesian network with discrete probabilities to predict the number of claims for a motor insurance customer, I will look at continuous probability distributions today. Here I follow example 16.17 in Loss Models: From Data to Decisions [1].
Suppose there is a class of risks that incurs random losses following an exponential distribution (density \(f(x) = \Theta {e}^{- \Theta x}\)) with mean \(1/\Theta\).

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