Active Portfolio Management

Question 0

What is Treynor-Black model

Answer 0

Portfolio optimization framework combining modern portfolio theory and market inefficiency

Question 1

Active portfolio management is justified both

Answer 1

Economically (as less actively managed funds deviate from fair value, investors allocate to active mgmt)
Empirically (portfolio managers w/abnormally high returns)

Question 2

Treynor -Black steps

Answer 2

1. Develop capital market expectations for passively managed portfolio
2. Identify mispriced securities (big alphas)
3. Determine weightings, form actively managed portfolio
4. Weight active/passive portfolios
5. Allocate funds to portfolio and risk free asset

Question 3

Calc stock alphas (Treynor black model)

Answer 3

Ai = stock i forecast return - (Rf+Bi(E(Rm - Rf)))

Question 4

How to determine weights for securities in actively managed portfolios

Answer 4

Size of weight is:

• positively related to alpha
• negatively related to unsystematic risk

Total of weights add to 1

Question 5

Calculate alpha for portfolio a

Answer 5

Aa = forecast return for a - (Rf - (B*E(Rm - Rf)))

Or Aa = w1A1 + w2A2

Question 6

How to adjust for analyst accuracy

Answer 6

1. Collect time series alpha forecasts for analyst
2. Calc correlation between forecast and realized alphas
3. Square correlation (R^2)
4. Adjust; forecast*R^2