A Practitioner's Guide to Asset Allocation

• Main Authors: Kinlaw, William, Kritzman, Mark P, Turkington, David, Markowitz, Harry M
• Format: eBook
• Language: English
• Published: New York John Wiley & Sons, Incorporated 2017; Wiley; Wiley-Blackwell
• Edition: 1
• Series: Wiley Finance
• Subjects: Asset allocation; Portfolio management

The authors' goal in writing this book is twofold: to describe several important innovations that address key challenges to asset allocation and to dispel certain fallacies about asset allocation. Section I covers the fundamentals of asset allocation, section II presents certain fallacies about...

Table of Contents:

• Chapter 18: Statistical and Theoretical Concepts -- Discrete and Continuous Returns -- Arithmetic and Geometric Average Returns -- Standard Deviation -- Correlation -- Covariance -- Covariance Invertibility -- Maximum Likelihood Estimation -- Mapping High-Frequency Statistics onto Low-Frequency Statistics -- Portfolios -- Probability Distributions -- The Central Limit Theorem -- The Normal Distribution -- Higher Moments -- The Lognormal Distribution -- Elliptical Distributions -- Probability of Loss -- Value at Risk -- Utility Theory -- Sample Utility Functions -- Alternative Utility Functions -- Expected Utility -- Certainty Equivalents -- Mean-Variance Analysis for More Than Two Assets -- Equivalence of Mean-Variance Analysis and Expected Utility Maximization -- Monte Carlo Simulation -- Bootstrap Simulation -- References -- Note -- Chapter 19: Glossary of Terms -- Index -- EULA
• Chapter 8: Necessary Conditions for Mean-Variance Analysis -- The Challenge -- Departures from Elliptical Distributions -- Departures from Quadratic Utility -- Full-Scale Optimization -- The Curse of Dimensionality -- Applying Full-Scale Optimization -- Summary -- References -- Notes -- Chapter 9: Constraints -- The Challenge -- Wrong and Alone -- Mean-Variance-Tracking Error Optimization -- References -- Note -- Chapter 10: Currency Risk -- The Challenge -- Why Hedge? -- Why Not Hedge Everything? -- Linear Hedging Strategies -- Nonlinear Hedging Strategies -- Economic Intuition -- References -- Notes -- Chapter 11: Illiquidity -- The Challenge -- Shadow Assets and Liabilities -- Expected Return and Risk of Shadow Allocations -- Other Considerations -- Case Study -- The Bottom Line -- Appendix -- References -- Notes -- Chapter 12: Risk in the Real World -- The Challenge -- End-of-Horizon Exposure to Loss -- Within-Horizon Exposure to Loss -- Regimes -- The Bottom Line -- References -- Notes -- Chapter 13: Estimation Error -- The Challenge -- Traditional Approaches to Estimation Error -- Stability-Adjusted Optimization -- Building a Stability-Adjusted Return Distribution -- Determining the Optimal Allocation -- Empirical Analysis -- The Bottom Line -- References -- Notes -- Chapter 14: Leverage versus Concentration -- The Challenge -- Leverage in Theory -- Leverage in Practice -- The Bottom Line -- References -- Notes -- Chapter 15: Rebalancing -- The Challenge -- The Dynamic Programming Solution -- The Markowitz-van Dijk Heuristic -- The Bottom Line -- References -- Notes -- Chapter 16: Regime Shifts -- The Challenge -- Predictability of Return and Risk -- Regime-Sensitive Allocation -- Tactical Asset Allocation -- The Bottom Line -- Appendix: Baum-Welch Algorithm -- References -- Notes -- Section Four: Addendum -- Chapter 17: Key Takeaways
• Cover -- Title Page -- Copyright -- Contents -- Foreword -- Preface -- Section One: Basics of Asset Allocation -- Chapter 1: What Is an Asset Class? -- Stable Aggregation -- Investable -- Internally Homogeneous -- Externally Heterogeneous -- Expected Utility -- Selection Skill -- Cost-Effective Access -- Potential Asset Classes -- References -- Notes -- Chapter 2: Fundamentals of Asset Allocation -- The Foundation: Portfolio Theory -- Practical Implementation -- References -- Notes -- Section Two: Fallacies of Asset Allocation -- Chapter 3: The Importance of Asset Allocation -- Fallacy: Asset Allocation Determines More Than 90 Percent of Performance -- The Determinants of Portfolio Performance -- The Behavioral Bias of Positive Economics -- The Samuelson Dictum -- References -- Notes -- Chapter 4: Time Diversification -- Fallacy: Time Diversifies Risk -- Samuelson's Bet -- Time, Volatility, and Probability of Loss -- Time and Expected Utility -- Within-Horizon Risk -- A Preference-Free Contradiction to Time Diversification -- The Bottom Line -- References -- Notes -- Chapter 5: Error Maximization -- Fallacy: Optimized Portfolios Are Hypersensitive to Input Errors -- The Intuitive Argument -- The Empirical Argument -- The Analytical Argument -- The Bottom Line -- References -- Notes -- Chapter 6: Factors -- Fallacy: Factors Offer Superior Diversification and Noise Reduction -- What Is a Factor? -- Equivalence of Asset Class and Factor Diversification -- Noise Reduction -- Where Does This Leave Us? -- References -- Notes -- Chapter 7: 1/N -- Fallacy: Equally Weighted Portfolios Are Superior to Optimized Portfolios -- The Case for 1/N -- Setting the Record Straight -- Empirical Evidence in Defense of Optimization -- Practical Problems with 1/N -- Broken Clock -- The Bottom Line -- References -- Note -- Section Three: Challenges to Asset Allocation