A Practitioner’s Guide to Asset Allocation

Cover --
Title Page --
Copyright --
Contents --
Foreword --
Preface --
Section One: Basics of Asset Allocation --
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 --
References --
Notes --
Section Two: Fallacies of Asset Allocation --
Chapter 3: The Importance of Asset Allocation --
Fallacy: Asset Allocation Determines More Than 90 Percent of Performance --
The Determinants of Portfolio Performance --
The Behavioral Bias of Positive Economics --
The Samuelson Dictum --
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 --
References --
Notes --
Chapter 5: Error Maximization --
Fallacy: Optimized Portfolios Are Hypersensitive to Input Errors --
The Intuitive Argument --
The Empirical Argument --
The Analytical Argument --
The Bottom Line --
References --
Notes --
Chapter 6: Factors --
Fallacy: Factors Offer Superior Diversification and Noise Reduction --
What Is a Factor? --
Equivalence of Asset Class and Factor Diversification --
Noise Reduction --
Where Does This Leave Us? --
References --
Notes --
Chapter 7: 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 --
References --
Note --
Section Three: Challenges to Asset Allocation. Chapter 8: 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 --
Summary --
References --
Notes --
Chapter 9: Constraints --
The Challenge --
Wrong and Alone --
Mean-Variance-Tracking Error Optimization --
References --
Note --
Chapter 10: Currency Risk --
The Challenge --
Why Hedge? --
Why Not Hedge Everything? --
Linear Hedging Strategies --
Nonlinear Hedging Strategies --
Economic Intuition --
References --
Notes --
Chapter 11: Illiquidity --
The Challenge --
Shadow Assets and Liabilities --
Expected Return and Risk of Shadow Allocations --
Other Considerations --
Case Study --
The Bottom Line --
Appendix --
References --
Notes --
Chapter 12: Risk in the Real World --
The Challenge --
End-of-Horizon Exposure to Loss --
Within-Horizon Exposure to Loss --
Regimes --
The Bottom Line --
References --
Notes --
Chapter 13: 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 --
References --
Notes --
Chapter 14: Leverage versus Concentration --
The Challenge --
Leverage in Theory --
Leverage in Practice --
The Bottom Line --
References --
Notes --
Chapter 15: Rebalancing --
The Challenge --
The Dynamic Programming Solution --
The Markowitz-van Dijk Heuristic --
The Bottom Line --
References --
Notes --
Chapter 16: Regime Shifts --
The Challenge --
Predictability of Return and Risk --
Regime-Sensitive Allocation --
Tactical Asset Allocation --
The Bottom Line --
Appendix: Baum-Welch Algorithm --
References --
Notes --
Section Four: Addendum --
Chapter 17: Key Takeaways. Chapter 18: 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 --
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 --
Note --
Chapter 19: Glossary of Terms --
Index --
EULA.