The Treynor-Black model assumes that
A) the objective of security analysis is to form an active portfolio of a limited number of mispriced securities.
B) the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock.
C) the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing, the market sensitivity of the security, and its degree of nonsystematic risk.
D) All of the options are correct.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The Treynor-Black model is a portfolio optimization model that combines both active and passive management strategies. It assumes that the objective of security analysis is to identify mispriced securities to form an active portfolio (A), acknowledges the cost of less than full diversification due to nonsystematic risk (B), and determines the optimal weight of a mispriced security in the active portfolio based on its degree of mispricing, market sensitivity, and nonsystematic risk (C). Therefore, all the given options are correct assumptions of the Treynor-Black model.

The Treynor-Black Model Assumes That