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

w^O = [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