You are previewing The New Science of Asset Allocation: Risk Management in a Multi-Asset World.
O'Reilly logo
The New Science of Asset Allocation: Risk Management in a Multi-Asset World

Book Description

A feasible asset allocation framework for the post 2008 financial world

Asset allocation has long been a cornerstone of prudent investment management; however, traditional allocation plans failed investors miserably in 2008. Asset allocation still remains an essential part of the investment arena, and through a new approach, you'll discover how to make it work.

In The New Science of Asset Allocation, authors Thomas Schneeweis, Garry Crowder, and Hossein Kazemi first explore the myths that plague this field then quickly move on to examine how the practice of asset allocation has failed in recent years. They then propose new allocation models that employ liquidity, transparency, and real risk controls across multiple asset classes.

  • Outlines a new approach to asset allocation in a post-2008 world, where risk seems hidden

  • The "great manager" problem is examined with solutions on how to capture manager alpha while limiting downside risk

  • A complete case study is presented that allocates for beta and alpha

Written by an experienced team of industry leaders and academic experts, The New Science of Asset Allocation explains how you can effectively apply this approach to a financial world that continues to change.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Preface
    1. OVERVIEW OF THE BOOK
  4. Acknowledgements
  5. CHAPTER 1 - A Brief History of Asset Allocation
    1. IN THE BEGINNING
    2. A REVIEW OF THE CAPITAL ASSET PRICING MODEL
    3. ASSET PRICING IN CASH AND DERIVATIVE MARKETS
    4. MODELS OF RETURN AND RISK POST-1980
    5. ASSET ALLOCATION IN THE MODERN WORLD
    6. PRODUCT DEVELOPMENT: YESTERDAY, TODAY, AND TOMORROW
    7. NOTES
  6. CHAPTER 2 - Measuring Risk
    1. WHAT IS RISK?
    2. TRADITIONAL APPROACHES TO RISK MEASUREMENT
    3. CLASSIC SHARPE RATIO
    4. OTHER MEASURES OF RISK ASSESSMENT
    5. PORTFOLIO RISK MEASURES
    6. OTHER MEASURES OF PORTFOLIO RISK MEASUREMENT
    7. VALUE AT RISK
    8. NOTES
  7. CHAPTER 3 - Alpha and Beta, and the Search for a True Measure of Manager Value
    1. WHAT IS ALPHA?
    2. ISSUES IN ALPHA AND BETA DETERMINATION
    3. PROBLEMS IN ALPHA AND BETA DETERMINATION
    4. MULTI-FACTOR RETURN ESTIMATION: AN EXAMPLE
    5. TRACKING ALTERNATIVES IN ALPHA DETERMINATION
    6. NOTES
  8. CHAPTER 4 - Asset Classes: What They Are and Where to Put Them
    1. OVERVIEW AND LIMITATIONS OF THE EXISTING ASSET ALLOCATION PROCESS
    2. ASSET ALLOCATION IN TRADITIONAL AND ALTERNATIVE INVESTMENTS: A ROAD MAP
    3. HISTORICAL RETURN AND RISK ATTRIBUTES AND STRATEGY ALLOCATION
    4. TRADITIONAL STOCK/BOND ALLOCATION VERSUS MULTI-ASSET ALLOCATION
    5. RISK AND RETURN COMPARISONS UNDER DIFFERING HISTORICAL TIME PERIODS
    6. EXTREME MARKET SENSITIVITY
    7. MARKET SEGMENT OR MARKET SENSITIVITY: DOES IT MATTER?
    8. HOW NEW IS NEW?
    9. NOTES
  9. CHAPTER 5 - Strategic, Tactical, and Dynamic Asset Allocation
    1. ASSET ALLOCATION OPTIMIZATION MODELS
    2. STRATEGIC ASSET ALLOCATION
    3. TACTICAL ASSET ALLOCATION
    4. DYNAMIC ASSET ALLOCATION
    5. NOTES
  10. CHAPTER 6 - Core and Satellite Investment: Market/Manager Based Alternatives
    1. DETERMINING THE APPROPRIATE BENCHMARKS AND GROUPINGS
    2. SAMPLE ALLOCATIONS
    3. CORE ALLOCATION
    4. SATELLITE INVESTMENT
    5. ALGORITHMIC AND DISCRETIONARY ASPECTS OF CORE/SATELLITE EXPOSURE
    6. REPLICATION BASED INDICES
    7. PEER GROUP CREATION—STYLE PURITY
    8. NOTES
  11. CHAPTER 7 - Sources of Risk and Return in Alternative Investments
    1. ASSET CLASS PERFORMANCE
    2. HEDGE FUNDS
    3. MANAGED FUTURES (COMMODITY TRADING ADVISORS)
    4. PRIVATE EQUITY
    5. REAL ESTATE
    6. COMMODITIES
    7. NOTES
  12. CHAPTER 8 - Return and Risk Differences among Similar Asset Class Benchmarks
    1. MAKING SENSE OUT OF TRADITIONAL STOCK AND BOND INDICES
    2. PRIVATE EQUITY
    3. REAL ESTATE
    4. ALTERNATIVE REIT INVESTMENTS INDICES
    5. COMMODITY INVESTMENT
    6. HEDGE FUNDS
    7. INVESTABLE MANAGER BASED HEDGE FUND INDICES
    8. CTA INVESTMENT
    9. INDEX VERSUS FUND INVESTMENT: A HEDGE FUND EXAMPLE
    10. NOTES
  13. CHAPTER 9 - Risk Budgeting and Asset Allocation
    1. PROCESS OF RISK MANAGEMENT: MULTI-FACTOR APPROACH
    2. PROCESS OF RISK MANAGEMENT: VOLATILITY TARGET
    3. RISK DECOMPOSITION OF PORTFOLIO
    4. RISK MANAGEMENT USING FUTURES
    5. RISK MANAGEMENT USING OPTIONS
    6. COVERED CALL
    7. LONG COLLAR
    8. NOTES
  14. CHAPTER 10 - Myths of Asset Allocation
    1. INVESTOR ATTITUDES, NOT ECONOMIC INFORMATION, DRIVE ASSET VALUES
    2. DIVERSIFICATION ACROSS DOMESTIC OR INTERNATIONAL EQUITY SECURITIES IS SUFFICIENT
    3. HISTORICAL SECURITY AND INDEX PERFORMANCE PROVIDES A SIMPLE MEANS TO FORECAST ...
    4. RECENT MANAGER FUND RETURN PERFORMANCE PROVIDES THE BEST FORECAST OF FUTURE RETURN
    5. SUPERIOR MANAGERS OR SUPERIOR INVESTMENT IDEAS DO NOT EXIST
    6. PERFORMANCE ANALYTICS PROVIDE A COMPLETE MEANS TO DETERMINE BETTER PERFORMING MANAGERS
    7. TRADITIONAL ASSETS REFLECT “ACTUAL VALUES” BETTER THAN ALTERNATIVE INVESTMENTS
    8. STOCK AND BOND INVESTMENT MEANS INVESTORS HAVE NO DERIVATIVES EXPOSURE
    9. STOCK AND BOND INVESTMENT REMOVES INVESTOR CONCERNS AS TO LEVERAGE
    10. GIVEN THE EFFICIENCY OF THE STOCK AND BOND MARKETS, MANAGERS PROVIDE NO USEFUL SERVICE
    11. INVESTORS CAN RELY ON ACADEMICS AND INVESTMENT PROFESSIONALS TO PROVIDE ...
    12. ALTERNATIVE ASSETS ARE RISKIER THAN EQUITY AND FIXED INCOME SECURITIES
    13. ALTERNATIVE ASSETS SUCH AS HEDGE FUNDS ARE ABSOLUTE RETURN VEHICLES
    14. ALTERNATIVE INVESTMENTS SUCH AS HEDGE FUNDS ARE UNIQUE IN THEIR INVESTMENT STRATEGIES
    15. HEDGE FUNDS ARE BLACK BOX TRADING SYSTEMS UNINTELLIGIBLE TO INVESTORS
    16. HEDGE FUNDS ARE TRADERS, NOT INVESTMENT MANAGERS
    17. ALTERNATIVE INVESTMENT STRATEGIES ARE SO UNIQUE THAT THEY CANNOT BE REPLICATED
    18. IT MAKES LITTLE DIFFERENCE WHICH TRADITIONAL OR ALTERNATIVE INDICES ARE USED IN ...
    19. MODERN PORTFOLIO THEORY IS TOO SIMPLISTIC TO DEAL WITH PRIVATE EQUITY, REAL ...
    20. NOTES
  15. CHAPTER 11 - The Importance of Discretion in Asset Allocation Decisions
    1. THE WHY AND WHEREFORE OF ASSET ALLOCATION MODELS
    2. VALUE OF MANAGER DISCRETION
    3. MANAGER EVALUATION AND REVIEW: THE DUE DILIGENCE PROCESS
    4. MADOFF: DUE DILIGENCE GONE WRONG OR NEVER CONDUCTED
    5. NOTES
  16. CHAPTER 12 - Asset Allocation: Where Is It Headed?
    1. AN UNCERTAIN FUTURE
    2. WHAT IS THE DEFINITION OF ORDER?
    3. COSTS AND BENEFITS
    4. TODAY’S ISSUE
    5. POSSIBLE GOVERNMENTAL AND PRIVATE FUND RESPONSES TO CURRENT MARKET CONCERNS
    6. NOTE
  17. APPENDIX - Risk and Return of Asset Classes and Risk Factors Through Business Cycles
  18. Glossary: Asset Class Benchmarks
  19. Bibliography
  20. About the Authors
  21. Index