ghiệm kiến thức Forex tại : https://tracnghiemfore EFFICIENT ASSET MANAGEMENT Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ This page intentionally left blank Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ EFFICIENT ASSET MANAGEMENT A Practical Guide to Stock Portfolio Optimization and Asset Allocation Second Edition By Richard O. Michaud and Robert O. Michaud 1 2008 Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ 1 Oxford University Press, Inc., publishes works that further Oxford University’s objective of excellence in research, scholarship, and education. Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Copyright © 2008 by Oxford University Press, Inc.
Published by Oxford University Press, Inc. 198 Madison Avenue, New York, New York 10016 www.com Oxford is a registered trademark of Oxford University Press. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press.
Library of Congress Cataloging-in-Publication Data Michaud, Richard O., 1941– Efficient asset management: a practical guide to stock portfolio optimization and asset allocation / Richard O. Michaud and Robert O.—(Financial management association survey and synthesis series) Includes bibliographical references (p. Investment analysis—Mathematical models. Portfolio management—Mathematical models.6—dc22 2007020912 987654321 Printed in the United States of America on acid-free paper Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ To My mother, Helena Talbot Michaud, and her steadfast love My father, Omer Michaud, and his cherished memory Prof.
Robin Esch, a wise, unerring mentor Drs. Allan Pineda, John Levinson, and Cary Atkins Richard Michaud, 2007 Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ This page intentionally left blank Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ Preface Effective asset management is not only a matter of identifying desirable investments: it also requires optimally structuring the assets within the portfolio. This is because the investment behavior of a portfolio is typi- cally different from the assets in it. For example, the risk of a portfolio of U.
equities is often half the average risk of the stocks in it. Prudent investors concern themselves with portfolio risk and return. An understanding of efficient portfolio structure is essential for opti- mally managing the investment benefits of portfolios. Effective portfolio management reduces risk while enhancing return.
For thoughtful inves- tors, portfolio efficiency is no less important than estimating risk and return of assets. Most institutional investors and financial economists acknowledge the investment benefits of efficient portfolio diversification. Optimally managing portfolio risk is an essential component of modern asset man- agement. Markowitz (1959, 1987) gave the classic definition of portfolio optimality: a portfolio is efficient if it has the highest expected (mean or estimated) return for a given level of risk (variance) or, equivalently, least risk for a given level of expected return of all portfolios from a given uni- verse of securities.
Markowitz mean-variance (MV) efficiency is a practi- cal and convenient framework for defining portfolio optimality and for constructing optimal stock portfolios and asset allocations. A number of commercial services provide optimizer software for computing MV effi- cient portfolios. Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ viii Preface INVESTOR ACCEPTANCE Modern asset management typically employs many theoretical financial concepts and advanced analytical techniques. Perhaps the most outstand- ing example is in the management of derivative instruments.
Within a few years of the publication of seminal papers (Black & Scholes, 1973; Merton, 1973) and the opening of derivative exchanges, an extensive indus- try applying quantitative techniques to derivative strategies emerged. In a similar fashion, many fixed income managers use sophisticated port- folio structuring techniques for cash flow liability management.1 In con- trast, many institutional equity managers do not use MV optimizers to structure portfolios. The relatively low level of analytical sophistication in the culture of institutional equity management is one often-cited reason for the lack of acceptance of MV optimization, along with organizational and politi- cal issues. The investment policy committee and an optimizer perform essentially the same integrative investment function.
Consequently, the firm’s senior investment officers may view an optimizer, and the quanti- tative specialist who manages it, as usurping their roles and challenging their control and political power in the organization. Despite these reasons, it is hard to imagine why investment managers do not behave in their best interests as well as those of their clients. Expe- rience in derivatives and fixed income management demonstrates that the investment community quickly adopts highly sophisticated analytics and computer technology when provably useful. If cultural, political, or com- petence factors limit the use of MV optimizers in traditional investment organizations, new firms should form without these limitations, with the objective of leveraging the technology and dominating the industry.
Indeed, many “quantitative” equity management firms, formed over the past 35 years, have this objective. However, the “Markowitz optimiza- tion enigma”—the fact that many traditional equity managers ignore MV optimization—can be largely explained without recourse to irrationality, incompetence, or politics (Michaud, 1989a). The basic problem is that MV portfolio efficiency has fundamental investment limitations as a practical tool of asset management. It is likely that the limitations of MV optimiz- ers have been an important factor in limiting the success of many quanti- tative equity managers relative to their more traditional competitors.
THE FUNDAMENTAL ISSUE Although Markowitz efficiency is a convenient and useful theoretical framework for defining portfolio optimality, in practice it is a highly error- prone and unstable procedure that often results in “error maximized” and 1. Liebowitz (1986) describes some of these techniques. Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ Preface ix “investment irrelevant” portfolios (Jobson & Korkie, 1980, 1981; Michaud, 1989a). Proposed alternative optimization technologies share similar, if not even more significant, limitations.
MV efficiency limitations in prac- tice generally derive from a lack of statistical understanding of the MV optimization process. A “statistical” view of MV optimization leads to new procedures that eliminate the most serious deficiencies for many practical applications. Statistical MV optimization may enhance invest- ment value while providing a more intuitive framework for asset man- agement. A statistical view also challenges and corrects many current practices for optimized portfolio management.
OVERVIEW This book describes the problems associated with MV optimization as a practical tool of asset management and provides resolutions that reflect its essential, though often neglected, statistical character. A review of proposed alternatives of MV optimization is given and their theoretical and practical limitations are noted. A “statistical” perspective serves as a valuable route for the development and application of powerful tech- niques that enhance the practical value of MV optimized portfolios. The goal is to conserve the many benefits of traditional MV optimiza- tion while enhancing investment effectiveness and avoiding its rigidity.
New tools are developed that enable an intuitive effective framework for meeting the demand characteristics from institutional asset managers to sophisticated financial advisors and investors. A simple asset allocation example illustrates the issues and new procedures. The text maintains a practical perspective throughout. The second edition is extensively revised.
Chapters 7 and 9 are nearly completely rewritten with new techniques, research, and expanded scope. Chapters 4, 5, 6, 8, 10, and 11 are extensively revised. The remain- ing chapters have also been updated. The new reader will find a rich investment-practice–informed set of ideas, while the reader of the first edition will find extensive new mate- rial, including expansion of scope as well as development of earlier ideas.
The new edition benefits from nearly 7 years of the authors’ experience applying the technology to a wide spectrum of practical investment needs, including those of institutional asset managers, investment strat- egists, high-net-worth advisors, institutional consultants, and financial advisors worldwide. The authors also have nearly 3 years of actual asset management using the technology with favorable results. FEATURES This text is the first to integrate and systematically treat practical MV optimization from a statistical, rather than a numerical, point of view. Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ x Preface The focus is to enhance the investment value of MV optimized portfolios in asset management practice.
The features include: • The Resampled Efficient Frontier™ (REF):2 REF optimized port- folios are provably effective at enhancing risk-adjusted perfor- mance. Implications of a more effective optimality on ineffective practices in contemporary asset management are discussed. • Resampled Efficiency™ (RE) Rebalancing:3 RE rebalancing pro- vides statistically rigorous procedures for trading, monitoring, and asset importance analysis for practical management of MV optimized portfolios. • Enhanced Index-Relative Optimization: New REF optimiza- tion techniques are presented for enhancing risk-adjusted per- formance of index-relative optimized and long-short portfolios, including new tools for large index management.
• Enhanced Liability-Relative Optimization: Discussion of eco- nomic liability modeling and REF optimization with applications to pension liability management. • Improved Estimation: Neglected modern statistical techniques for improving the forecast value of historically estimated risk and return. • Active Management Input Estimation: Bayes techniques for improving the investment value of active return. • Comparison of Unconstrained and Linear Constrained MV Opti- mization: The discussion includes the serious limitations of MV optimization analytical formulas and the character of computa- tional techniques.
• Optimization Design: Institutional techniques for managing invest- ment information properly and avoiding optimization errors • MV Optimization Review: Includes review of basic principles and limitations of alternative approaches. PATENTS The reader should note that various techniques and practices described within this book particularly in chapters 6, 7, and 9, are covered by the claims of patents, issued and pending, in the US and other countries, including US Patent Nos. law provides that any use within the United States of a patented invention during the 2. REF optimization, invented by Richard Michaud and Robert Michaud, first described in Michaud (1998, Chapter 6), is protected by U.
and Israeli patents and patents pending worldwide. New Frontier Advisors, LLC (NFA) is exclusive worldwide licensee. RE rebalancing, invented by Robert Michaud and Richard Michaud, first described in its current form in Michaud and Michaud (2002), is protected by U. patents and patents pending worldwide.
New Frontier Advisors, LLC (NFA) is exclusive worldwide licensee. Trắc nghiệm kiến thức Forex tại : https://tracnghiemforex.com/ Preface xi term of the patent and without the authority of the patent owner is an infringement of the patent, while corresponding provisions apply in other jurisdictions. Any party contemplating the use of a patented article or process, as defined by the claims of a patent, must obtain authorization of the patent owner before beginning any use. A request for permission to use the invention should specify, as completely as possible, the nature of the intended use.
DEMO OPTIMIZER A CD that provides access to a demo Optimizer is included with the pur- chase of the book. It offers a limited-function version of the optimization and rebalancing procedures described in this book. When inserted into your CD drive, a pop-up window will appear to guide you in signing up for an account to run the software for a limited time. The Optimizer allows you to generate some exhibits similar to those in the book using the preloaded base case data described in Chapter 2.
You are able to make changes with constraints and other assumptions to analyze their effects. You can also enter your own sample data set for experimenting with the RE optimizer and rebalancer. The Optimizer automatically compares the classical MV solution to the RE solution in tables and charts. The Opti- mizer software is provided for non-commercial educational uses only.
All other applications are proscribed. AUDIENCE AND ANALYTICAL REQUIREMENTS Knowledge of statistical methods and modern finance at the level of a relatively nontechnical paper in the Financial Analysts Journal, Journal of Investment Management, or Journal of Portfolio Management is desirable. CFAs and MBAs should be well equipped to manage the material.