According to the solution to problem 60 in the afternoon mock, in the TB model the weight of each security in the active portfolio depends on its alpha, beta and specific risk. In every treatment of TB I’ve seen, including CFAI v. 6, p. 534, equation 9, the weights only depend on alpha and the specific risk, not beta. Anyone care to comment?
You need beta to compute alpha… everyone struggled with this…trick ?
Thanks… that’s pretty lame of them if you ask me…
Me too got it wrong. Trick!!
Somewhere buried in the TB reading is a calculation in order to find the weighted average beta.
Yes, but that is for finding the weights on the passive portfolio as a whole and the active portfolio as a whole. It does not concern the weights on the individual securities within the active portfolio.
Wrong, you use beta with CAPM to get the required return on the stock for alpa
Yes, but that isn’t the point I was responding to. The weighted average beta that bpdulog was referring to is used in the manner I described. It isn’t used to find the weights of the individual securities within the active portfolio. With regards to the exam question, customarily when someone says x depends on y, they mean that it is an explicit relation, not implicit, which is why I think the CFA answer is lame.
Got me too… I marked that answer with confidence and was pissed when I saw I was wrong. Realized june’s comment after the fact… need beta for to calc alpha
I got stung in exactly the same manner on this one. Saw the Beta and decided it wasn’t required as we already had the alpha and stdev. On the upside, if there are ambiguous questions on the real exam, there is the chance that they may be removed by the marking panel during the review.
Try telling the manager of a market-neutral hedge fund that his returns depend on beta and see how that goes!
haha cpk123 would be PISSED if he saw this post
^^ what if you tell him his analysts stink because their alpha estimates stink. Seeking alpha…more than a website. CPK commented on this same question yesterday
I got this one wrong for a different reason. I included beta because of it’s use in weighted average alpha, etc., but I read it as non-specific variance, and we use non-specific standard deviation. Thinking too much I guess.
for something as convoluted as TB, and for all the things they could ask - this question was just teririble!! Should be a violation of code of ethics. THIS QUESTION SENT ME OVER THE EDGE!!! I struggle to “learn” TB and this is how that knowledge is “tested”. There’s a whole step that talks all about the weights and alpha and hoohaa and it’s third cousin. I let go of beta back in step 2! DAMN IT! insanity… and yeah I know its not the real exam. sorry. it ticked me off. I think you can tell. goodbye…