Sunday, May 17, 2020
Using the Treynor Black Model in Active Portfolio Management
Treynor-Black Model Using the Treynor-Black Model in Active Portfolio Management Aruna Eluri, David S. Price, Kelly Walker Course Project for IE590 Financial Engineering Purdue University, West Lafayette, IN 47907-2023 August 1, 2011 Abstract In 1973, Jack Treynor and Fischer Black published a mathematical model for security selection called the Treynor-Black model. The model finds the optimum portfolio to hold in the situation where an investor considers that most securities are priced effectively, but believes he has information that can be used to predict an abnormal performance of a few of them. The theory behind the model is presented, along with numerical examples to highlight specific realistic investment scenarios and how the†¦show more content†¦By blending a portfolio of these assets with an index fund, the investment manager can produce a portfolio that can outperform the benchmark while also keeping risk at a relatively low level. [1] 2 2.1 Theory Assumptions In using the Treynor-Black model, the following assumptions are made. [11] 1. Analysts have a limited ability to find a select number of undervalued securities while the rest are assumed to be fairly priced (i.e. the security markets are nearly efficient). 2. There is a high degree of co-movement among security prices. 3. The â€Å"independent†returns of different securities are almost, but not quite, statistically independent. 4. The costs of buying and selling are ignored in order to treat the portfolio problem as a single period problem. 5. Individual Portfolio managers can estimate the future performance of certain securities that is not reflected in the current price or projected market return of the asset. Page 2 Treynor-Black Model 6. Individual Portfolio managers can estimate the expected risk and return parameters for a broad market (passively managed) portfolio. 7. The quantitative performance measure for a single asset is alpha, which is determined in a subjective manner. 8. All returns areShow MoreRelatedAlternative Beta Funds Are All High Dividend Oriented1361 Words  | 6 Pages 1) Alternative beta funds are all high-dividend oriented and therefore strive to provide low variance on high returns, achieved through a combination of active management and passive tracking of their corresponding benchmark indices. The differing benchmarks mean that each ETF is invested in different sectors and firms and these strategies lead to varying performance. RDV RDV matches the Russell Australia High-Dividend Index; its investments are primarily in large, well established firms suchRead MoreFins 2624 - Portfolio Management Notes Essay14466 Words  | 58 PagesCheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 LECTURE 1 – BOND PRICING WHAT IS A BOND? A bond is a claim on some fixed future cash flows. A commonwealth government bond (CGB) is a bond which pays semi-annual coupons, in which the maturity date/ coupon payment date is on the 15th of every month. A zero coupon bond is a bond with no coupons. The important information of a bond: 1. 2. 3. 4. 5. 6. †¢ 1. 2. Transaction date: T Settlement date:T+2 Coupon payment dates Maturity dateRead MoreCfa Level 3 2013 Summary8327 Words  | 34 Pagesavoided. investments aren t viewed in a portfolio context. Prudent Expert Rule: Revised version of the prudent man rule required by ERISA to guide managers of pension and profit sharing portfolios. The main addition is that the manager must act as someone with familiarity with matters relating to the management of money, not just prudence. Prudent Investor rule: This is a modified version of Prudent Man Rule in that it views asset allocation from a portfolio context. An asset (like derivatives)Read MoreSecurity Analysis Portfolio Management7511 Words  | 31 PagesPROJECT ON SECURITY ANALYSIS PORTFOLIO MANAGEMENT A STUDY ON SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT INTRODUCTION: Traditional    security    analysis   emphasis    the   projection   of   prices   and   dividends   accordingly the potential price the firms common stock and the future   dividend seem were   to   be   forecast   and   the discount allowed 10%. The traditional views    are   on   the   intensive   and current market price   of    security if the current market priceRead MoreCorporate Finance174197 Words  | 697 PagesQuestions 1. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the
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