Treynor-Black Model

Nobel laureate William Sharpe came up with the Sharpe Ratio: a super-famous way to help investors understand how the returns of their investments compared to the risk taken to get them.

If you want to make your portfolio look, um...Sharpe, the Treynor-Black model is one way to do it. It’s a portfolio optimization model that maximizes a portfolio's Sharpe Ratio. The Treynor-Black model assumes that the market is pretty efficient...but not totally efficient. That’s where their model comes in.

If you do your research and strike gold, finding some mispriced securities that can generate you crazy-good returns, you can use them to hit your ideal Sharpe Ratio. The Treynor-Black model combines an actively managed portfolio with some of these undervalued securities, in addition to some stability offered by passively managed index funds.

Didn’t know you could have the best of both worlds, did ya? Ask Miley.