Index funds appeal to efficient market theorists in part because they offer a low-cost way of investing in the market without trying to exploit infrequent mispricing. While active management of any sort may seem incongruous against the efficient market backdrop, it is active management, or the search for alpha, that clears up mispricings and theoretically leads to market equilibrium. The Treynor-Black model is an optimization framework that assumes markets are nearly efficient but does allow for some active management. The Treynor-Black model assumes a portfolio consisting of index funds, stocks, and the risk-free return. Put options have no place in that model |
