Treynor-Black model: optimal portfolio

(Question)
The optimal portfolio for an investor under the Treynor-Black model:

A. depends on analyst forecast accuracy.
B. depends on the unsystematic risk of mispriced securities.
C. is not sensitive to a change in the risk-free rate of interest.


Answer: B

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• While the Treynor-Black model can be modified to include analyst forecast accuracy in the calculation of active portfolio weights, this is NOT part of the model itself.
• The unsystematic risk of securities in the active portfolio is an important input into the information ratio and active portfolio weights.
• A change in the risk-free rate can be expected to change an investor's allocation between the risk-free asset and the optimal risky portfolio and will change the estimates of abnormal returns (alpha) for active portfolio stocks, and, thereby, their portfolio weights.