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Treynor Black Model Definition
A Treynor Black model seeks to optimize a portfolio’s Sharpe Ratio by combining an active investment with underpriced securities and a passively managed index fund.
A Little More on What is the Treynor Black Model
Published in 1973 by Jack Treynor and Fisher Black, this model implies that a market is highly efficient, but not perfect. It also analyses the possibility of investors making excess profits from underpriced securities or stocks.
Passive market portfolios contain securities according to their market value, and a general assumption is that expected returns can only be estimated by macroenomic forecasting (an attempt to predict the future of an economy by combining important and generally accepted indicators).
Each security is measured according to the ratio its excess returns per benchmark index to its unsystematic risk (risk specific to the investment alone) in an active portfolio.
This ratio is known as the Treynor-Black or appraisal ratio, and it measures the value of which an investment adds to a portfolio. In this model, a security which has high excess returns will be given more value, while those with low unsystematic risk will be given low values.
The Treynor-Black model is less popular among investors due to the difficulty of picking stocks as required by the model, and restriction on short selling (an investor borrows a stock, sells it to a buyer, and then buy it back at a lower price and return it to the lender) prevent the opportunity for excess returns.
References for “Treynor-Black Model”
Academic research for “Treynor-Black Model”
[PDF] Active portfolio management: The power of the Treynor-Black model, Kane, A., Kim, T. H., & White, H. (2003). Active portfolio management: The power of the Treynor-Black model. Working Paper, University of California, San Diego.
Incorporating alpha uncertainty into portfolio decisions: A Bayesian revisit of the Treynor–Black model, He, Z. L. (2007). Incorporating alpha uncertainty into portfolio decisions: A Bayesian revisit of the Treynor–Black model. Journal of Asset Management, 8(3), 161-175.
Portfolio return using Black-litterman single view model with ARMA-GARCH and Treynor Black model, Arisena, A., Noviyanti, L., & Zanbar, S. A. (2018, March). Portfolio return using Black-litterman single view model with ARMA-GARCH and Treynor Black model. In Journal of Physics: Conference Series (Vol. 974, No. 1, p. 012023). IOP Publishing.
The Power of an Actively Managed Portfolio: an Empirical Example Using the Treynor-Black Model, Brown, A. D. (2015). The Power of an Actively Managed Portfolio: an Empirical Example Using the Treynor-Black Model (Doctoral dissertation, The University of Mississippi).
[PDF] … MEDIANTE LA APLICACIÓN DEL MODELO DE TREYNOR-BLACK ACTIVE PORTFOLIO MANAGEMENT BY APPLYING THE TREYNOR-BLACK MODEL, Sanchez, A. V. (2012). GESTIÓN ACTIVA DE PORTAFOLIOS MEDIANTE LA APLICACIÓN DEL MODELO DE TREYNOR-BLACK ACTIVE PORTFOLIO MANAGEMENT BY APPLYING THE TREYNOR-BLACK MODEL. INVESTIGACIÓN & DESARROLLO, 12, 72-87.
Three centuries of asset pricing, Dimson, E., & Mussavian, M. (1999). Three centuries of asset pricing. Journal of Banking & Finance, 23(12), 1745-1769.
Performance measurement doesn’t make sense, Ferguson, R. (1980). Performance measurement doesn’t make sense. Financial Analysts Journal, 36(3), 59-69.
[PDF] Investigating underperformance by mutual fund portfolios, Day, T., Wang, Y., & Xu, Y. (2000). Investigating underperformance by mutual fund portfolios. Working PapeerSchool of Management, The University of Texas at Dallas.
Is online trading gambling with peanuts?, Anderson, A. (2006). Is online trading gambling with peanuts?. Working paper series/Sonderforschungsbereich 504, Rationalitätskonzepte, Entscheidungsverhalten und Ökonomische Modellierung, 6.
Alpha construction in a consistent investment process, Ceria, S., Sivaramakrishnan, K., & Stubbs, R. A. (2017). Alpha construction in a consistent investment process. In Portfolio Construction, Measurement, and Efficiency (pp. 257-274). Springer, Cham.