Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is 18%. The standard deviation of the return on the market portfolio is 25%. The nonsystematic standard
Deviation of the active portfolio is 15%. The risk-free rate of return is 6%. The beta of the active portfolio is 1.2.
The optimal proportion to invest in the active portfolio is
A) 50.0%.
B) 69.4%.
C) 72.3%.
D) 80.6%.
E) 100.0%.

Question

Quizplus · Accepted Answer

wO = [3%/2.25%]/[(18% 6%)/6.25%] = 0.6944; w* = 0.6944/[1 + (1 1.2)0.6944] = 0.8064, or 80.6%.

Consider the Treynor-Black Model