Due to the instability of the Markowitz mean-variance model in managing problems associated with multi-asset class portfolios, the Treynor-Black model was established. Treynor-Black's model fits the modern portfolio allocation approach where there are certain portfolios that are active and others that are passive. Here, passive refers to an investment that follows the market rate of return—not to beat the market average return but to closely follow the market return.
An active portfolio refers to the portfolio of investment in which we seek to deliver an above-market average return. The lower the market return with a market risk level, the higher the portfolio. Then, we allocate the total capital to an active portfolio. So, why take more risk if the market return is good enough? The Treynor-Black model seeks to allocate more weight to the asset that delivers a higher return/risk level out of the total risk/return level of the...
