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  3. briefly explain the treynor-black model. draw a di

Briefly explain the Treynor-Black model. Draw a diagram of the model to include the active...

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Finance

  1. Briefly explain the Treynor-Black model. Draw a diagram of the model to include the active portfolio, the market portfolio and the optimum risky portfolio. On your diagram show the Sharpe ratios of each of these components.

(7 marks)

  1. An informed insider, who knows the value of an asset, is considering trading it to make profits. An uninformed noise trader buys or sells the asset with equal probabilities, depending on liquidity needs. Trade size is 1 unit of the asset. A risk neutral market maker believes the asset has a value of 80 with a probability of 0.6 and 30 with a probability of 0.4. She cannot identify the type of a trader, but clears the market by observing the order flow and then setting a price to make zero expected profits. Work out the expected trading profit for the insider and optimal price setting strategy of the market maker.

(9 marks)

  1. An investor wants to implement a returns-based momentum strategy. Using the method in the Study Guide, what money position should be held in each of the four stocks given below if the total long position is to be $1,000? Explain your reasoning.
Security Period 1 Period 2

A

 30 40
B 50 70
C 60 65
D 10 12

(9 marks)

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