# PM 6: Active Portfolio Construction

• Created by: charlie
• Created on: 20-05-18 17:36
Black-Treynor model
Active managers cant analyse thousands of securities: identify those most mis-priced (form portfolio A) then combine with passive portfolio (A) to reduce residual risk and form new portfolio (P)
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Black-Treynor model: graph
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Black-Treynor model: Step 1) Find optimal composition of A to max appraisal ratio
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Black-Treynor model: Step 2) Find optimal proportion to invest in A (beta = 1) to max sharpe ratio
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Black-Treynor model: Step 3) Find optimal proportion to invest in A (adjust for beta) to max. sharpe ratio
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Black-Treynor model: Step 4) Combine (P) with rf to find optimal capital allocation
Depends on investors risk averse preferences
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Measuring the performance of P (equation)
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Measuring the performance of P: Appraisal ratio
Measures performance of A that is contribution of securities appraisal to total performance (value-added/ direct measure of analytic skills)
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Data used to generate BTM comes from specialised units
1) Macro forecasting (market data) 2) Quantitative teams (asset data) 3) Combining these to make return predictions + correlations for assets 4) Use this to make alpha predictions
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BTM: takeaway questions
1) How much does it cost to construct (A) (fees) given its appraisal ratio (value-added) 2) How much do we trust our inputs? (accuracy of forecasts for alpha/ res risk)
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## Other cards in this set

### Card 2

#### Front

Black-Treynor model: graph

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### Card 3

#### Front

Black-Treynor model: Step 1) Find optimal composition of A to max appraisal ratio

### Card 4

#### Front

Black-Treynor model: Step 2) Find optimal proportion to invest in A (beta = 1) to max sharpe ratio

### Card 5

#### Front

Black-Treynor model: Step 3) Find optimal proportion to invest in A (adjust for beta) to max. sharpe ratio