Asset Allocation: From Theory to Practice and Beyond (Wiley Finance)

✍ Scribed by Mark P. Kritzman, William Kinlaw, David Turkington

• Publisher: Wiley
• Year: 2021
• Tongue: English
• Leaves: 369
• Edition: 1
• Category: Library

✦ Synopsis

Discover a masterful exploration of the fallacies and challenges of asset allocation

In Asset Allocation: From Theory to Practice and Beyond—the newly and substantially revised Second Edition of A Practitioner’s Guide to Asset Allocation—accomplished finance professionals William Kinlaw, Mark P. Kritzman, and David Turkington deliver a robust and insightful exploration of the core tenets of asset allocation.

Drawing on their experience working with hundreds of the world’s largest and most sophisticated investors, the authors review foundational concepts, debunk fallacies, and address cutting-edge themes like factor investing and scenario analysis. The new edition also includes references to related topics at the end of each chapter and a summary of key takeaways to help readers rapidly locate material of interest.

The book also incorporates discussions of:

• The characteristics that define an asset class, including stability, investability, and similarity
• The fundamentals of asset allocation, including definitions of expected return, portfolio risk, and diversification
• Advanced topics like factor investing, asymmetric diversification, fat tails, long-term investing, and enhanced scenario analysis as well as tools to address challenges such as liquidity, rebalancing, constraints, and within-horizon risk.

Perfect for client-facing practitioners as well as scholars who seek to understand practical techniques, Asset Allocation: From Theory to Practice and Beyond is a must-read resource from an author team of distinguished finance experts and a forward by Nobel prize winner Harry Markowitz.

✦ Table of Contents

Cover
Title Page
Copyright Page
Contents
Foreword to the First Edition
Preface
Key Takeaways
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
The Sharpe Algorithm
References
Notes
Chapter 3 The Importance of Asset Allocation
Fallacy: Asset Allocation Determines More than 90% of Performance
The Determinants of Portfolio Performance
The Behavioral Bias of Positive Economics
The Samuelson Dictum
The Bottom Line
Related Topics
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
Related Topics
References
Notes
Chapter 5 Divergence
Fallacy: Volatility Scales with the Square Root of Time,
and Correlation Is Constant Across Return Intervals
Excess Dispersion
The Evidence
The Intuition
The Math
Implications
The Bottom Line
Related Topics
References
Notes
Chapter 6 Correlation Asymmetry
Fallacy: Diversification Is Symmetric
Correlation Mathematics
Correlation Asymmetry Between Asset Classes
Implications for Portfolio Construction
The Bottom Line
Related Topics
References
Notes
Chapter 7 Error Maximization
Fallacy: Optimized Portfolios are Hypersensitive to Input Errors
The Intuitive Argument
The Empirical Argument
The Analytical Argument
The Bottom Line
Related Topics
References
Notes
Chapter 8 Factors
Fallacy: Factors Offer Superior Diversification and Noise Reduction
What Is a Factor?
Equivalence of Asset Class and Factor Diversification
Noise Reduction
The Bottom Line
Related Topics
References
Notes
Chapter 9 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
Related Topics
References
Note
Chapter 10 Policy Portfolios
Fallacy: Policy Portfolios Matter
Risk Instability
What Investors Want
Responding to Risk Regimes
The Bottom Line
Related Topics
References
Chapter 11 The Private Equity Leverage Myth
Fallacy: Private Equity Volatility Scales with Its Leverage
The Private Equity Leverage Puzzle
Leverage and Volatility in the Public Equity Market
The Bottom Line
Related Topics
References
Notes
Chapter 12 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
The Bottom Line
Related Topics
References
Notes
Chapter 13 Forecasting
The Challenge
Conventional Linear Regression
Regression Revisited
Partial Sample Regression
The Bottom Line
Related Topics
References
Note
Chapter 14 The Stock–Bond Correlation
The Challenge
Single-Period
Correlation
Fundamental Predictors of the Stock–Bond Correlation
Model Specification
Model Results
The Bottom Line
Related Topics
References
Notes
Chapter 15 Constraints
The Challenge
Wrong and Alone
Mean-Variance-Tracking Error Optimization
The Bottom Line
Reference
Note
Chapter 16 Asset Allocation Versus Factor Investing
The Challenge
Portfolio Construction
Case Study
The Bottom Line
Related Topics
References
Notes
Chapter 17 Illiquidity
The Challenge
Shadow Assets and Liabilities
Expected Return and Risk of Shadow Allocations
Other Considerations
Case Study
The Bottom Line
Related Topics
Appendix
References
Notes
Chapter 18 Currency Risk
The Challenge
Why Hedge?
Why Not Hedge Everything?
Linear Hedging Strategies
Nonlinear Hedging Strategies
The Bottom Line
Related Topics
References
Notes
Chapter 19 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
Related Topics
References
Notes
Chapter 20 Leverage Versus Concentration
The Challenge
Leverage in Theory
Leverage in Practice
The Bottom Line
Related Topics
References
Notes
Chapter 21 Rebalancing
The Challenge
The Dynamic Programming Solution
The MvD Heuristic
The Bottom Line
Related Topics
References
Notes
Chapter 22 Regime Shifts
The Challenge
Predictability of Return and Risk
Regime-Sensitive Allocation
Tactical Asset Allocation
The Bottom Line
Appendix: Baum–Welch Algorithm
Related Topics
References
Notes
Chapter 23 Scenario Analysis
The Challenge
Comparison to Mean-Variance
Analysis
The Mahalanobis Distance Applied to Scenario Analysis
The Mahalanobis Distance and Probability
Revising Probabilities
Case Study
Mapping Economic Variables onto Asset Class Returns
The Bottom Line
Related Topics
References
Notes
Chapter 24 Stress Testing
The Challenge
End-of-Horizon Exposure to Loss
Within-Horizon Exposure to Loss
Regimes
The Bottom Line
Related Topics
References
Notes
Chapter 25 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
The Mahalanobis Distance
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
Notes
Glossary of Terms
Index
EULA