The Treynor-Black Model

Treynor and Black developed a portfolio optimization model that seeks to maximize a portfolio's Sharpe Ratio through a combination of an actively managed portfolio component built with a few select mispriced securities and a passively managed market index portfolio component.
Treynor-Black assumes that markets are highly, but no perfectly efficient.
Macroeconomic forecasting can be applied to calculate the expected return and standard deviation of the portfolio.
Securities can be assessed for mispricing by comparing the forecasted return with the required return based on the Security Market Line.
Mispricing presents the opportunity for abnormal return, where abnormal return is the analyst's expected return minus the required return dictated by the Security Market Line.
The cost of less than full market diversification is reflected by the variance of the residual error of the active securities.

Treynor-Black Process

Economists create forecasts to derive inputs for the security representing the market portfolio.
Security analysts isolate the few securities mispriced by the market.
The portfolio manager constructs the optimal portfolio.
Post investment period quality analysis can be done by:
Measuring the correlation squared of the security analyst's forecasted alphas to actual alphas realized.
A high correlation will give the portfolio manager confidence in the analysts' abilities to correctly identify mispriced securities in the future.

Some investors may prohibit their portfolio managers from short selling, which limits the ability to exploit overpriced assets.
Treynor-Black relies on successfully forecasting alpha, which is incredibly difficult for even well trained analysts.