# Treynor-Black

So on the start of reading 67 it says that we don’t have to memorize/derive any of the equations from the sections detailing TB. I’ve read on this forum that a big snafu question on last year’s exam was TB one. Anyone know to what level we need to know this stuff? Should we assume to just know the conceptual stuff and that formulas will be provided?

not last year - but 2007 or 2008 I believe. and it related to the methodology itself, not to any calculations… the bigger snafu also was “schweese” had “Squeezed” it out… in their discussions… so it was a big surprise to everyone, other than those who had read the text.

Kind of like that ECN question on last year’s exam. Boy, did that come out left field.

Sooooo…what do we need to know then? I’m glad you don’t have to calculate it, cause that is some scary looking business…

Know how the process works, what inputs you need to do perform the analysis. Know what Treynor-Black entails in terms of risk and return. Just know everything except the formulas.

It strange to me that you say we do not have to calculate it when in the three EOC’s at the end of the chapter they have gone through a question where the optimal portfolio was calculated using a passive portfolio and also calculating the weights in an active portfolio. The active portfolio was constructed under two scenarios, one with short selling allowed and one without.

concering schweser,concept checkers, page 261.question five says that the beta of the marketportfolio and of portfolia A are identical. the beta of portfolio A is 1 which we derived from the calculation. i don’t see how we get a beta of 1 for the market index? because only the market index variance of 0.04 is given… ? any ideas? or what am I missing?

jeffsick Wrote: ------------------------------------------------------- > It strange to me that you say we do not have to > calculate it when in the three EOC’s at the end of > the chapter they have gone through a question > where the optimal portfolio was calculated using a > passive portfolio and also calculating the weights > in an active portfolio. The active portfolio was > constructed under two scenarios, one with short > selling allowed and one without. I don’t think they included those questions in order for you to do the calculations. Look at the answer explanation. Look at what they are trying to accomplish and what the results are.

yellayella Wrote: ------------------------------------------------------- > concering schweser,concept checkers, page > 261.question five says that the beta of the > marketportfolio and of portfolia A are > identical. > the beta of portfolio A is 1 which we derived from > the calculation. i don’t see how we get a beta of > 1 for the market index? because only the market > index variance of 0.04 is given… ? any ideas? or > what am I missing? Beta is a measure of risk compared with the market portfolio. As the market portfolio is the benchmark, it’s beta is always 1.

Okay but why include them, as you said, i attempted them and went straight to the answers and started memorising formulas for the weights of the active portfolio , etc, etc

Honestly, just reading the TB Model stuff did not do very much to help me understand the model. I got what it was doing but not the specific steps of the model. But after I worked the problems, it helped me to understand the steps a lot better. while the EOC’s may be more than what you need to do on the test they’ll help you understand the model in a deeper way. It may just help you answer the actual test question on TB correctly. I’d much rather have the EOC’s dig deeper than what I’ll need on the actual exam, than have them not go far enough. I think the TB Model is one of those things you could easily inadvertantly blow off and not know enough of on the exam. The EOC’s make you actually take a second look at it and make you realize that even though you just read about the TB model, you don’t really know s**t about it. At least that was my feeling after those EOC’s.

You do need to know how to calculate an investor’s exposure in the risky portfolio M, and the rest being in a rf asset. That’s at the beginning of the CFA chapter on Active Portfolio Management. Other than that, adjust analyst’s alpha by R2. That’s easy. Other than that, know how to weight analyst alpha and reconstitute the portfolio. Study the metrics behind Treynor Black, it’s not difficult.