Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation / Edition 2

Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation / Edition 2

by Richard O. Michaud, Robert O. Michaud
     
 

ISBN-10: 0195331915

ISBN-13: 9780195331912

Pub. Date: 12/28/2007

Publisher: Oxford University Press, USA

In spite of theoretical benefits, Markowitz mean-variance (MV) optimized portfolios often fail to meet practical investment goals of marketability, usability, and performance, prompting many investors to seek simpler alternatives. Financial experts Richard and Robert Michaud demonstrate that the limitations of MV optimization are not the result of conceptual flaws

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Overview

In spite of theoretical benefits, Markowitz mean-variance (MV) optimized portfolios often fail to meet practical investment goals of marketability, usability, and performance, prompting many investors to seek simpler alternatives. Financial experts Richard and Robert Michaud demonstrate that the limitations of MV optimization are not the result of conceptual flaws in Markowitz theory but unrealistic representation of investment information. What is missing is a realistic treatment of estimation error in the optimization and rebalancing process.

The text provides a non-technical review of classical Markowitz optimization and traditional objections. The authors demonstrate that in practice the single most important limitation of MV optimization is oversensitivity to estimation error. Portfolio optimization requires a modern statistical perspective. Efficient Asset Management, Second Edition uses Monte Carlo resampling to address information uncertainty and define Resampled Efficiency (RE) technology. RE optimized portfolios represent a new definition of portfolio optimality that is more investment intuitive, robust, and provably investment effective. RE rebalancing provides the first rigorous portfolio trading, monitoring, and asset importance rules, avoiding widespread ad hoc methods in current practice.

The Second Edition resolves several open issues and misunderstandings that have emerged since the original edition. The new edition includes new proofs of effectiveness, substantial revisions of statistical estimation, extensive discussion of long-short optimization, and new tools for dealing with estimation error in applications and enhancing computational efficiency. RE optimization is shown to be a Bayesian-based generalization and enhancement of Markowitz's solution. RE technology corrects many current practices that may adversely impact the investment value of trillions of dollars under current asset management. RE optimization technology may also be useful in other financial optimizations and more generally in multivariate estimation contexts of information uncertainty with Bayesian linear constraints.

Michaud and Michaud's new book includes numerous additional proposals to enhance investment value including Stein and Bayesian methods for improved input estimation, the use of portfolio priors, and an economic perspective for asset-liability optimization. Applications include investment policy, asset allocation, and equity portfolio optimization. A simple global asset allocation problem illustrates portfolio optimization techniques. A final chapter includes practical advice for avoiding simple portfolio design errors.

With its important implications for investment practice, Efficient Asset Management 's highly intuitive yet rigorous approach to defining optimal portfolios will appeal to investment management executives, consultants, brokers, and anyone seeking to stay abreast of current investment technology. Through practical examples and illustrations, Michaud and Michaud update the practice of optimization for modern investment management.

This edition includes a CD that contains a demo of the patented, internet-based optimization software created by the authors at their consulting firm, New Frontier Advisors, which has been chosen to cosponsor the new Harry M. Markowitz Award.

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Product Details

ISBN-13:
9780195331912
Publisher:
Oxford University Press, USA
Publication date:
12/28/2007
Series:
Financial Management Association Survey and Synthesis Series
Pages:
144
Product dimensions:
9.30(w) x 6.20(h) x 0.80(d)

Table of Contents

Preface
Ch. 1Introduction1
Ch. 2Classic Mean-Variance Optimization7
Ch. 3Traditional Criticisms and Alternatives23
Ch. 4Understanding Mean-Variance Efficiency33
Ch. 5Portfolio Review and Mean-Variance Efficiency41
Ch. 6Portfolio Analysis and the Resampled Efficient Frontier49
Ch. 7Portfolio Revision and Confidence Regions71
Ch. 8Input Estimation and Stein Estimators83
Ch. 9Benchmark Active Asset Allocation101
Ch. 10Investment Policy and Economic Liabilities115
Ch. 11Return Forecasts and Mixed Estimation127
Ch. 12Avoiding Optimization Errors133
Epilogue141
Bibliography143
Index149

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