Chapter 27 – The Theory of Active Portfolio Management
27-1
CHAPTER TWENTY-SEVEN
THE THEORY OF ACTIVE PORTFOLIO MANAGEMENT
CHAPTER OVERVIEW
This chapter discusses the theory of active portfolio management. The chapter develops a theoretical
approach to optimization of active managed portfolios.
LEARNING OBJECTIVES
After studying this chapter the student should be able to understand the Treynor-Black Model of efficient
PRESENTATION OF CHAPTER MATERIAL
27.1 Optimal Portfolios and Alpha Values
The chapter covers two theoretical models to incorporate active management—first, the Treynor-Black
Model that was originally presented in Chapter 8. The second, the Black-Litterman Model is discussed
later in the chapter.
Using Spreadsheet 27.1 the authors apply the Treynor-Model and finds that combining active and passive
27.2 The Treynor-Black Model and Forecast Precision
The next section of the text presents the Treynor-Black Model with adjustments for accuracy of forecasts.
Optimization of the risky portfolio entails a number of tasks in terms of expertise and the need for
independence. The organizational chart shown in Figure 27.4 is designed to accomplish the task.
27.3 The Black-Litterman Model
Application of the Black-Litterman (BL) Model is presented in this section. The text discusses the
27.4 Treynor-Black Versus Black-Litterman: Complements, not Substitutes
Chapter 27 – The Theory of Active Portfolio Management
27.5 The Value of Active Management
27.6 Concluding Remarks
The chapter concludes with a discussion of why theory should be applied to portfolio construction. It
makes the argument that the distance between theory and practice has narrowed in recent years and the
CFA is expanding the industry knowledge base.
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