Treynor and Mazuy model active managers' market timing ability by introducing a quadratic term.

Question

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One model that seeks to measure both stock selectivity and market timing is that of Treynor and Mazuy (1966).Active fund managers are expected to respond to changes in market conditions.Hence,the characteristic line is not linear but curved.That is,the slope of the characteristic line itself changes in response to levels of the market.Consequently,the performance measure needs to recognise this non-linear relationship.The Treynor and Mazuy measure introduces a quadratic term.

Treynor and Mazuy Model Active Managers' Market Timing Ability by Introducing