Efficient Asset Management : A Practical Guide to Stock Portfolio Optimization and Asset Allocation.
Title:
Efficient Asset Management : A Practical Guide to Stock Portfolio Optimization and Asset Allocation.
Author:
Michaud, Richard O.
ISBN:
9780199715794
Personal Author:
Edition:
2nd ed.
Physical Description:
1 online resource (136 pages)
Series:
Financial Management Association Survey and Synthesis
Contents:
Title -- Copyright -- Dedication -- Preface -- Contents -- 1 Introduction -- Markowitz Efficiency -- An Asset Management Tool -- Traditional Objections -- The Most Important Limitations -- Resolving the Limitations of Mean-Variance Optimization -- Illustrating the Techniques -- 2 Classic Mean-Variance Optimization -- Portfolio Risk and Return -- Defining Markowitz Efficiency -- Optimization Constraints -- The Residual Risk-Return Efficient Frontier -- Computer Algorithms -- Asset Allocation Versus Equity Portfolio Optimization -- A Global Asset Allocation Example -- Reference Portfolios and Portfolio Analysis -- Return Premium Efficient Frontiers -- Appendix: Mathematical Formulation of MV Efficiency -- 3 Traditional Criticisms and Alternatives -- Alternative Measures of Risk -- Utility Function Optimization -- Multiperiod Investment Horizons -- Asset-Liability Financial Planning Studies -- Linear Programming Optimization -- 4 Unbounded MV Portfolio Efficiency -- Unbounded MV Optimization -- The Fundamental Limitations of Unbounded MV Efficiency -- Repeating Jobson and Korkie -- Implications of Jobson and Korkie Analysis -- Statistical MV Efficiency and Implications -- 5 Linear Constrained MV Efficiency -- Linear Constraints -- Efficient Frontier Variance -- Rank-Associated Efficient Portfolios -- How Practical an Investment Tool? -- 6 The Resampled Efficient Frontier™ -- Efficient Frontier Statistical Analysis -- Properties of Resampled Efficient Frontier Portfolios -- True and Estimated Optimization Inputs -- Simulation Proofs of Resampled Efficiency Optimization -- Why Does It Work -- Certainty Level and RE Optimality -- FC Level Applications -- The REF Maximum Return Point (MRP) -- Implications for Asset Management -- Conclusion -- Appendix A: Rank-Versus λ-Associated RE Portfolios -- Appendix B: Robert's Hedgehog.
7 Portfolio Rebalancing, Analysis, and Monitoring -- Resampled Efficiency and Distance Functions -- Portfolio Need-to-Trade Probability -- Meta-Resampling Portfolio Rebalancing -- Portfolio Monitoring and Analysis -- Conclusion -- Appendix: Confidence Region for the SampleMean Vector -- 8 Input Estimation and Stein Estimators -- Admissible Estimators -- Bayesian Procedures and Priors -- Four Stein Estimators -- James-Stein Estimator -- James-Stein MV Efficiency -- Out-of-Sample James-Stein Estimation -- Frost-Savarino Estimator -- Covariance Estimation -- Stein Covariance Estimation -- Utility Functions and Input Estimation -- Ad Hoc Estimators -- Stein Estimation Caveats -- Conclusions -- Appendix: Ledoit Covariance Estimation -- 9 Benchmark Mean-Variance Optimization -- Benchmark-Relative Optimization Characteristics -- Tracking Error Optimization and Constraints -- Constraint Alternatives -- Roll's Analysis -- Index Efficiency -- A Simple Benchmark-Relative Framework -- Long-Short Investing -- Conclusion -- 10 Investment Policy and Economic Liabilities -- Misusing Optimization -- Economic Liability Models -- Endowment Fund Investment Policy -- Pension Liabilities and Benchmark Optimization -- Limitations of Actuarial Liability Estimation -- Current Pension Liabilities -- Total and Variable Pension Liabilities -- Economic Significance of Variable Liabilities -- Economic Characteristics of VBO Liabilities -- An Example: Economic Liability Pension Investment Policy -- Past and Future of Defined Benefit Pension Plans -- Conclusion -- 11 Bayes and Active Return Estimation -- Current Practices -- Bayes Principles -- The Bayes Return Formula -- A Bayes Panel Illustration -- Bayesian Mixed Estimation Issues -- Enhanced Inputs or Enhanced Optimizer -- Bayesian Caveats -- 12 Avoiding Optimization Errors -- Scaling Inputs -- Financial Reality.
Liquidity Factors -- Practical Constraint Issues -- Biased Portfolio Characteristics -- Index Funds and Optimizers -- Optimization from Cash -- Forecast Return Limitations -- Conclusion -- Epilogue -- Bibliography -- Index.
Abstract:
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.
Local Note:
Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2017. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries.
Genre:
Added Author:
Electronic Access:
Click to View