| Purdue Computational Finance Program | |
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Revisiting Treynor and Black (1973): an Intertemporal Model of Active Portfolio Management
April 3, 2003 |
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Abstract:
In the line of Treynor and Black (1973), we provide a closed-form solution to the problem of an investor with non-myopic CRRA utility who selects an optimal portfolio when assets offer an abnormal expected return. In the model of portfolio optimization with partial information in continuous time, we assume that the investor has a normal prior on the abnormal returns of the securities and upgrades those priors in a Bayesian way. We allow the priors to be correlated and show that the correlation between priors is an important parameter in the determination of optimal holdings. The time horizon of the investor is another important parameter. We also account for the presence of portfolio constraints. These results provide a formal model for long/short investment strategies and have implications for the active management industry. Authors: Jaksa Cvitanic, Ali Lazrak, Lionel Martellini and Fernando Zapatero |
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