# active portfolio - security selection

Rosemary Stone, CFA, uses the Treynor-Black active portfolio optimization model. Stone attempts to quantify the importance of security selection in the model. Stone should conclude that security selection is of high importance if the actively managed portfolio is characterized by: Alpha----Unsystematic risk A) Large----Large B) Small----Small C) Small----Large D) Large----Small

D?

Gotta be D.

lol. yes it is! For some reason I chose A and I still have no idea why? Probably the bedbugs are calling me to come to them

Dinesh…Can you post the reason for D that was given

Since its late, you probably didn’t feel like looking at the rest of the answers. With that correct answer, I am out.

sure chadtap - here it is. The Treynor-Black portfolio optimization model assigns greater weight to the actively managed portfolio if its alpha is large relative to its unsystematic risk. As more weight is given to the actively managed portfolio, more importance is placed on active security selection (from which the actively managed portfolio is created).

thanks dinesh

Niblita75 Wrote: ------------------------------------------------------- > Since its late, you probably didn’t feel like > looking at the rest of the answers. With that > correct answer, I am out. I have a looong way to go. It’s going to be a loooong night. Probably till 8, may be more… GN to you, and try solving a forward rate(12,2) using spot rates with bootstrapping, In your dreams tonite

What does this question want from me?? Frederick Kurzonkowski, CFA, employs the Treynor-Black portfolio optimization model at his firm, TBP, where he serves as portfolio manager. TBP recently decided against holding short positions in their portfolios. Kurzonkowski is asked to determine the most likely result of the short-sale prohibition on the weights allocated to the long positions in the active portfolio, and to the alpha on the active portfolio. Kurzonkowski should make the following predictions about the effects of the prohibition on short sales on the actively managed portfolio: Allocation to long positions ------- Alpha A) Decreases ------- Increases B) Increases ------- Decreases C) Increases ------- Increases D) Decreases ------- Decreases

B

^^ pourquoi?

Haven’t got a clue where it is in the CFAI book but in the real world the possibility of short sales increases the IR and thus alpha. A is also true, though but since the question talks about prohibition of short sales I figured they’re looking for B.

B too…prohibition on short sale would limit the opportunity to earn extra return from overprices securities… just thinking why it can’t be D…cant we reduce the size of active portfolio.

Rakesh is the closest. D is the correct answer.

I think D, Short sale allows for over 100% allocation to long position, so when you take short position away you reduce the allocation to long to normal level of 100% max and alpha decreases naturally.

Dineh you beat me to posting the answere as I was typing…but I am glad to know I was correct… tell me if my reasoning is correct or not?

Hmmmmmmmmmmmmmmmmmmmmmmmmm is that the logic here. Okay. Need to review this part from the CFAI books.

N.VanCandidate is 100% correct with his reasoning!