Question

Explain the difference between Treynor-Black Model and Black-Litterman Model about active portfolio management.

Answer 1

Portfolio Management

Portfolio Management refers to the art of decision making for making investments in a certain mix of assets which is done in a certain manner by matching the objectives of the investors to their investment needs and asset allocation for individuals and institutions by balancing the risk against performance.

Here we are going to discuss about the difference between the Treynor-Black Model and the Black Litterman model. The Treynor-Black Model and the Black Litterman model are the tools in portfolio management which should be used in complementary to each other.

Treynor-Black Model

Treynor-Black Model is a mathematical model which is used for security selection and this model was published by Fischer Black and Jack Treynor in the year 1973. The model is constructed with an aim to find the optimum portfolio given certain conditions where the investors believes that the securities are priced efficiently. The Treynor-Black model is geared at security analysis of a portfolio.

Black-Litterman Model

The Black-Litterman Model is a mathematical model which is geared at asset allocation was developed in the year 1990 at Golman Sachs by Fischer Black and Robert Litterman and was later published in the year 1992. This model was developed with an aim to overcome the problems which the institutional investors encountered while implementing the modern portfolio theory and put them into practice. This model is used to determine the optimal asset allocation in a portfolio of assets and securities.