It seeks to overcome problems that institutional investors have encountered in applying modern portfolio theory in practice.
For example, a globally invested pension fund must choose how much to allocate to each major country or region.
In principle modern portfolio theory (the mean-variance approach of Markowitz) offers a solution to this problem once the expected returns and covariances of the assets are known.
While modern portfolio theory is an important theoretical advance, its application has universally encountered a problem: although the covariances of a few assets can be adequately estimated, it is difficult to come up with reasonable estimates of expected returns.
Black–Litterman overcame this problem by not requiring the user to input estimates of expected return; instead it assumes that the initial expected returns are whatever is required so that the equilibrium asset allocation is equal to what we observe in the markets.