Treynor-Black asset weighting because, correct, active, wrong

soverby

Is this statement correct?

"Each stock's weight in the active portfolio is determined on the basis of its alpha, beta, and var(e)."

I thought it was wrong because beta isn't used in determining the weight, but CFAI says it's correct.

President1988

Beta is used to determine alpha

eoin

MFIN--- Wrote:
-------------------------------------------------------
> Beta is used to determine alpha

Thanks. I forgot we used ex-ante alphas. But damn this question, I could also say this statement was wrong because it didn't mention the risk-free rate and market premium.

giorgio10

And by the way I think I remember a question about a statement saying:

"The weighting of each stock in the active portfolio is determined by its alpha and systematic risk."

This is wrong because we need unsystematic risk, not systematic, the solution says so, and I completely agree. But for the statement in my first post, beta is a measure of systematic risk. Now this is getting confusing...

senlinlang

remember risk free rate and MRP are constant for all assets. i think the term 'determined' is meant to say has unique impact on the asset weighting. so beta var(e) and alpha are the factors that are specific to each asset

zestzorb Wrote:
-------------------------------------------------------
> MFIN--- Wrote:
> --------------------------------------------------
> -----
> > Beta is used to determine alpha
>
> Thanks. I forgot we used ex-ante alphas. But damn
> this question, I could also say this statement was
> wrong because it didn't mention the risk-free rate
> and market premium.

thecfawannabe

Although Beta is a measure of systematic risk, just remember it's used in CAPM which Alpha is determined through....so you need Beta to be able to find Alpha....I agree with as well with 'tiredofstudying' in his statement (as well his name)

SFoyil

tiredofstudying Wrote:
-------------------------------------------------------
> remember risk free rate and MRP are constant for
> all assets. i think the term 'determined' is meant
> to say has unique impact on the asset weighting.
> so beta var(e) and alpha are the factors that are
> specific to each asset
>
>---

Actually it matters. If you change the risk-free rate and the market premium, each alpha's proportion will be different. They affect the alpha equally but not proportionately.

And if we already know alphas, why should we bother with betas?

liquidity

just read the question along with our explanations and you should catch on...

I sort of agree though with why beta is included since once you get alpha, you don't need beta anymore... but the question doesn't say the only final two pieces of information that you need... it's simply true that beta is required at some point... and the question i'm assuming doesn't ask what "every piece of information is required to determine the weighting".. it just asks whether this statement is true, which it is.

iteracom

always think of the big picture!!

of course, risk free rate and MRP will affect alpha. but there is only ONE risk free rate. and only ONE MRP. for all assets in the universe. so these are constant. and play the same role in alpha calculation for every security - the only reason alpha differs, is cause of beta. hence why beta, alpha and var (e) determine asset weighting.

zestzorb Wrote:
-------------------------------------------------------
> tiredofstudying Wrote:
> --------------------------------------------------
> -----
> > remember risk free rate and MRP are constant
> for
> > all assets. i think the term 'determined' is
> meant
> > to say has unique impact on the asset
> weighting.
> > so beta var(e) and alpha are the factors that
> are
> > specific to each asset
> >
> >---
>
> Actually it matters. If you change the risk-free
> rate and the market premium, each alpha's
> proportion will be different. They affect the
> alpha equally but not proportionately.
>
> And if we already know alphas, why should we
> bother with betas?

19831985

MFIN--- Wrote:
-------------------------------------------------------
> it just asks whether this statement is true, which it is.

Ok I got that. When I think of it this way, the answer is absolutely right.