# Difficulty moderate short answer questions 49 discuss

• Notes
• 27
• 100% (4) 4 out of 4 people found this document helpful

This preview shows pages 26–27. Sign up to view the full content.

distribution of the squared information ratio of in the universe of securities. Difficulty: Moderate Short Answer Questions 49. Discuss the Treynor-Black model . The Treynor-Black estimates the alpha, beta, and residual risk of securities under consideration for a portfolio. The model uses these estimates to determine the optimal weights of each of these securities in the portfolio. These composite estimates for the active portfolio and the macroeconomic forecasts for the passive index portfolio are used to determine the optimal risky portfolio, which will be a combination of the passive and active portfolios. Feedback: The purpose of this question is to ascertain if the student understands the basic concepts behind this model, which allows the portfolio manager to utilize both active and passive components of portfolio building to obtain an optimal portfolio. Difficulty: Moderate 27-26

This preview has intentionally blurred sections. Sign up to view the full version.

Chapter 27 - The Theory of Active Portfolio Management 50. You have a record of an analyst's past forecasts of alpha. Describe how you would use this information within the context of the Treynor-Black model to determine the forecasting ability of the analyst. You can use the index model and valid estimates of beta, you can estimate the ex-post alphas from the average realized return and the return on the market index. The equation is . Then you would estimate a regression of the forecasted alphas on the realized alphas as in the equation . The coefficients a 0 and a 1 reflect the bias in the forecasts. If there is no bias a 0 =0 and a 1 =1. The forecast errors are uncorrelated with the true alpha, so the variance of the forecast is . To measure the value of the forecast, you would use the squared correlation coefficient between the forecasts and the realizations. This can also be determined by the formula . If the analyst has perfect forecasting ability the correlation coefficient will be 1. If the analyst has no ability then the correlation coefficient will be 0. For values in between 0 and 1 you can adjust the forecasts by multiplying by the correlation. Feedback: The value of active management depends on the analyst's ability to forecast accurately. The best way to exploit analysts' forecasts is with the Treynor-Black model. Difficulty: Difficult 27-27
This is the end of the preview. Sign up to access the rest of the document.
• Spring '10
• HAMZA
• Management, Active management, Modern portfolio theory, Active Portfolio Management, active portfolio

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern