Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is 10%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active
Portfolio is 2%. The risk-free rate of return is 3%. The beta of the active portfolio is 1.15. The optimal proportion
To invest in the active portfolio is
A) 48.7%.
B) 98.4%.
C) 51.3%.
D) 100.0%.

Question

Quizplus · Accepted Answer

wO = [3%/2%]/[(10% 3%)/4%] = 0.857; w* = 0.857/[1 + (1 1.15)0.857] = .984, or 98.4%.

Consider the Treynor-Black Model