Quantitative Portfolio Optimisation, Asset Allocation and Risk Management (Finance and Capital Markets)

✍ Scribed by Mikkel Rasmussen

• Publisher: Palgrave Macmillan
• Year: 2003
• Tongue: English
• Leaves: 461
• Category: Library

✦ Synopsis

This practical book serves as a comprehensive guide to quantitative portfolio optimization, asset allocation, and risk management. Providing an accessible yet rigorous approach to investment management, it gradually introduces ever more advanced quantitative tools for these areas. Using extensive examples, this book guides the reader from basic return and risk analysis, all the way through to portfolio optimization and risk characterization, and finally on to fully fledged quantitative asset allocation and risk management. It employs such tools as enhanced modern portfolio theory using Monte Carlo simulation and advanced return distribution analysis, analysis of marginal contributions to absolute and active portfolio risk, Value-at-Risk and Extreme Value Theory.

✦ Table of Contents

Contents......Page 6
List of Figures......Page 10
List of Tables......Page 15
PART I A BASIS FOR QUANTITATIVE MANAGEMENT AND ANALYSIS......Page 18
Introduction......Page 20
The Case for Quantitative Management......Page 21
Structure of this Book......Page 23
Defining Investment Returns......Page 26
Examples from the Real World......Page 29
Excess Returns and Risk-free Rates......Page 35
Residual/Abnormal Returns......Page 36
Appendix......Page 37
Risk is Not Just a Four-letter Word......Page 40
Defining Risk......Page 43
A Brief Note on Normality......Page 52
Summary......Page 54
Pricing and Valuation......Page 55
Determining the Discount Rate......Page 56
The Dividend Discount Model (DDM)......Page 58
The Discounted Cash Flow Model (DCF)......Page 60
Old vs. New Economy – A Valuation Example......Page 67
Implied Growth Rates......Page 76
The Security Market Line (SML)......Page 80
The Characteristic Line (CL)......Page 83
The Arbitrage Pricing Theory (APT)......Page 85
Summary......Page 87
PART II MODERN PORTFOLIO THEORY......Page 88
Introduction......Page 90
Portfolio Return – The Sum of its Parts......Page 91
Portfolio Risk – Less Than the Sum of its Parts......Page 92
The Nature of Diversification......Page 104
Summary......Page 108
Appendix......Page 109
Portfolio Efficiency......Page 114
Quantitative Portfolio Optimisation......Page 116
The Efficient Frontier......Page 128
Benefits from International Diversification......Page 134
Optimisation and Diversification......Page 142
Summary......Page 144
Appendix......Page 145
Expected Return and Risk......Page 155
The CAPM Revisited......Page 156
Factor Models – The APT Revisited......Page 160
Volatility and Correlation......Page 163
Return Distributions (Risk Characterisation)......Page 170
The Correlation Structure......Page 175
Summary......Page 179
PART III ASSET ALLOCATION......Page 182
The Investment Policy Statement......Page 184
Choosing the Benchmark......Page 188
Summary......Page 192
The Asset Allocation Decision......Page 194
Traditional Portfolio Construction Techniques......Page 195
Quantitative Portfolio Optimisation for Asset Allocation......Page 203
Introducing an MSCI Global Sector Model......Page 211
Summary......Page 216
Quantitative Optimisation and Monte Carlo Simulations......Page 218
The Efficient Ridge......Page 222
The Quasi-Random Monte Carlo Simulated Asset Allocation......Page 232
Summary......Page 240
Appendix......Page 242
Bayesian Priors and Stein Estimators......Page 256
Optimal Return Shrinkage......Page 259
Optimal Covariance Matrix Shrinkage......Page 272
Summary......Page 287
Introduction......Page 290
SAA vs. TAA – Theory......Page 291
SAA vs. TAA – Practice......Page 298
Summary......Page 307
The Sector Rotation Framework......Page 308
Conceptual Framework......Page 310
A Note on Determining Appropriate Model Inputs......Page 316
Asset Allocation Through the Business Cycle......Page 320
Summary......Page 330
PART IV QUANTITATIVE RISK MANAGEMENT......Page 332
Definitions of Tracking Error......Page 334
Risk Geometry......Page 337
Information Ratio......Page 341
Active Management Value Added......Page 344
Summary......Page 347
The Global Perspective......Page 349
Risk Characterisation......Page 350
Constructing the Model......Page 357
Portfolio Risk-Management Implications......Page 362
MSCTR and MSCAR for the Global Sector Model......Page 364
The Efficient Ridge Revisited......Page 376
General Thoughts on Active Risk Management......Page 381
Summary......Page 392
Appendix 15A: Sector Indices and Volatilities......Page 394
Appendix 15B: Sector Returns......Page 397
Appendix 15C: Sector Return Distributions......Page 400
Appendix 15D: Portfolio Volatility and Tracking Error......Page 403
Appendix 15E: Portfolio Beta......Page 406
The Basics......Page 409
Variance–Covariance VaR......Page 412
Historical Simulation of VaR......Page 413
Multivariate Normal Distributions......Page 421
Monte Carlo Simulated VaR......Page 431
VaR Along the Efficient Frontier......Page 432
Marginal Contributions to VaR......Page 433
Extreme Value Theory (EVT)......Page 436
Summary......Page 438
Appendix 16A: Sector Tail Return Frequencies......Page 440
Appendix 16B: Sector Multivariate Normal Distribution......Page 443
Appendix 16C: Sector Extreme Value Charts......Page 446
Appendix: Notation......Page 449
A......Page 451
C......Page 452
E......Page 453
I......Page 454
O......Page 455
R......Page 456
V......Page 457
D......Page 458
M......Page 459
R......Page 460
W......Page 461