Consider the Treynor-Black Model

question 22

Multiple Choice

Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 16%. The variance of return on the market portfolio is 4%. The nonsystematic variance of the active
Portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1. The optimal proportion to
Invest in the active portfolio is

• A) 0%.
• B) 25%.
• C) 50%.
• D) 100%.

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Definitions:

Liability Account

An account on the balance sheet that represents obligations to pay debts or amounts owing to lenders, suppliers, employees, or other creditors.

Rent Received

Income earned from leasing out property or equipment to another party.

Materiality

A principle that dictates that all significant information that could influence the decision-making process of users of financial statements should be disclosed.