Question

An investor is using the treynor-black model of active portfolio construction. if her optimal allocation to risky assets y* is 0.8. her active portfolio reward-to-risk ratio is 0.5 and the market reward-to-risk ratio is 2.0, what percentage of her optimal complete portfolio would she invest in the active portfolio?

a. 20%
b. 25%
c. 40%
d. 5%
e. none of the options are correct.

Answer 1

To determine the percentage of her optimal complete portfolio that the investor should invest in the active portfolio, we can use the Treynor-Black model. The investor should invest 80% of her optimal complete portfolio in the active portfolio. Therefore, the investor should invest 80% of her optimal complete portfolio in the active portfolio. The correct option is a. 20%.

Step-by-step explanation:

To determine the percentage of her optimal complete portfolio that the investor should invest in the active portfolio, we can use the Treynor-Black model. The active portfolio reward-to-risk ratio is defined as the excess return of the active portfolio divided by its excess risk. In this case, the active portfolio reward-to-risk ratio is 0.5, and the market reward-to-risk ratio is 2.0. The optimal allocation to risky assets (y*) is 0.8.

The formula to calculate the percentage allocation to the active portfolio is:

Percentage allocation = (Active portfolio reward-to-risk ratio) * (Market reward-to-risk ratio) * (Optimal allocation to risky assets)

Plugging in the given values:

Percentage allocation = 0.5 * 2.0 * 0.8 = 0.8

Therefore, the investor should invest 80% of her optimal complete portfolio in the active portfolio. The correct option is a. 20%.