Mock Exam Error re Treynor Black? care, only, afternoon, including, equation

grharmeyer

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?

Nishant1

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.

giorgio10

^^ 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

Iginla2011

haha cpk123 would be PISSED if he saw this post

NakedPuts00

Try telling the manager of a market-neutral hedge fund that his returns depend on beta and see how that goes!

SeanWest

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

stalkey

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.

lucasg85

Wrong, you use beta with CAPM to get the required return on the stock for alpa

Benjiko

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.

Windjammer

Somewhere buried in the TB reading is a calculation in order to find the weighted average beta.