Portfolio Theory and Performance Analysis
For many years asset management was considered to be a marginal activity, but today, it is central to the development of financial industry throughout the world. Asset management's transition from an "art and craft" to an industry has inevitably called integrated business models into question, favouring specialisation strategies based on cost optimisation and learning curve objectives. This book connects each of these major categories of techniques and practices to the unifying and seminal conceptual developments of modern portfolio theory. In these bear market times, performance evaluation of portfolio managers is of central focus. This book will be one of very few on the market and is by a respected member of the profession. Allows the professionals, whether managers or investors, to take a step back and clearly separate true innovations from mere improvements to well-known, existing techniques Puts into context the importance of innovations with regard to the fundamental portfolio management questions, which are the evolution of the investment management process, risk analysis and performance measurement Takes the explicit or implicit assumptions contained in the promoted tools into account and, by so doing, evaluate the inherent interpretative or practical limits
eBook, English, 2005
John Wiley & Sons, Incorporated, Hoboken, 2005
1 online resource (282 pages).
9780470858752, 0470858753
1047707161
Portfolio Theory and Performance Analysis
Contents
Acknowledgements
Biographies
Introduction
1 Presentation of the Portfolio Management Environment
1.1 The different categories of assets
1.1.1 Presentation of the different traditional asset classes
1.1.2 Alternative instruments
1.1.3 Grouping by sector
1.2 Definition of portfolio management
1.2.1 Passive investment management
1.2.2 Active investment management
1.3 Organisation of portfolio management and description of the investment management process
1.3.1 The different phases of the investment management process
1.3.2 The multi-style approach
1.3.3 Performance analysis
1.4 Performance analysis and market efficiency
1.4.1 Market efficiency
1.4.2 Performance persistence
1.5 Performance analysis and the AIMR standards
1.6 International investment: additional elements to be taken into account
1.7 Conclusion
Bibliography
2 The Basic Performance Analysis Concepts
2.1 Return calculation
2.1.1 Return on an asset
2.1.2 Portfolio return
2.1.3 International investment
2.1.4 Handling derivative instruments
2.1.5 The AIMR standards for calculating returns
2.2 Calculating relative return
2.2.1 Benchmarks
2.2.2. Peer groups
2.2.3. A new approach: Portfolio Opportunity Distributions
2.3 Definition of risk
2.3.1 Asset risk
2.3.2 Link between the variations in returns on two assets
2.3.3 Other statistical measures of risk
2.3.4 Risk indicators for fixed income investment
2.3.5 Foreign asset risk
2.3.6 The AIMR standards and risk
2.3.7 Generalisation of the notion of risk: Value-at-Risk
2.4 Estimation of parameters
2.4.1 Use of time-series
2.4.2 Scenario method
2.4.3 Forecast evaluation
2.5 Conclusion. Appendix 2.1 Calculating the portfolio return with the help of arithmetic and logarithmic asset returns
Appendix 2.2 Calculating the continuous geometric rate of return for the portfolio
Appendix 2.3 Stock exchange indices
Bibliography
3 The Basic Elements of Modern Portfolio Theory
3.1 Principles
3.1.1 Utility functions and indifference curves
3.1.2 Risk aversion
3.2 The Markowitz model
3.2.1 Formulation of the model
3.2.2 Choosing a particular portfolio on the efficient frontier
3.2.3 Impact of transaction costs when determining the optimal portfolio
3.2.4 International diversification and currency risk
3.3 Efficient frontier calculation algorithm
3.3.1 The Markowitz-Sharpe critical line algorithm
3.3.2 Other algorithms
3.4 Simplified portfolio modelling methods
3.4.1 Sharpe's single-index model
3.4.2 Multi-index models
3.4.3 Simplified methods proposed by Elton and Gruber
3.5 Conclusion
Appendix 3.1 Resolution of the Markowitz problem
Bibliography
4 The Capital Asset Pricing Model and its Application to Performance Measurement
4.1 The CAPM
4.1.1 Context in which the model was developed
4.1.2 Presentation of the CAPM
4.1.3 Modified versions of the CAPM
4.1.4 Conclusion
4.2 Applying the CAPM to performance measurement: single-index performance measurement indicators
4.2.1 The Treynor measure
4.2.2 The Sharpe measure
4.2.3 The Jensen measure
4.2.4 Relationships between the different indicators and use of the indicators
4.2.5 Extensions to the Jensen measure
4.2.6 The tracking-error
4.2.7 The information ratio
4.2.8 The Sortino ratio
4.2.9 Recently developed risk-adjusted return measures
4.3 Evaluating the management strategy with the help of models derived from the CAPM: timing analysis
4.3.1 The Treynor and Mazuy (1966) method. 4.3.2 The Henriksson and Merton (1981) and Henriksson (1984) models
4.3.3 Decomposition of the Jensen measure and evaluation of timing
4.4 Measuring the performance of internationally diversified portfolios: extensions to the CAPM
4.4.1 International Asset Pricing Model
4.4.2 McDonald's model
4.4.3 Pogue, Solnik and Rousselin's model
4.5 The limitations of the CAPM
4.5.1 Roll's criticism
4.5.2 Conclusion
Bibliography
5 Developments in the Field of Performance Measurement
5.1 Heteroskedastic models
5.1.1 Presentation of the ARCH models
5.1.2 Formulation of the model for several assets
5.1.3 Application to performance measurement
5.2 Performance measurement method using a conditional beta
5.2.1 The model
5.2.2 Application to performance measurement
5.2.3 Model with a conditional alpha
5.2.4 The contribution of conditional models
5.2.5 Extensions to the model
5.2.6 Comparison with the first model
5.3 Performance analysis methods that are not dependent on the market model
5.3.1 The Cornell measure
5.3.2 The Grinblatt and Titman measure and the positive period weighting measure
5.3.3 Performance measure based on the composition of the portfolio: Grinblatt and Titman study
5.4 Conclusion
Bibliography
6 Multi-factor Models and their Application to Performance Measurement
6.1 Presentation of the multi-factor models
6.1.1 Arbitrage models
6.1.2 Empirical models
6.1.3 Link between the two types of model
6.2 Choosing the factors and estimating the model parameters
6.2.1 Explicit factor models
6.2.2 Implicit or endogenous factor models
6.2.3 Comparing the different models
6.3 Extending the models to the international arena
6.3.1 The international arbitrage models
6.3.2 Factors that explain international returns
6.4 Applying multi-factor models. 6.4.1 Portfolio risk analysis
6.4.2 Choice of portfolio
6.4.3 Decomposing the performance of a portfolio
6.4.4 Timing analysis
6.4.5 Style analysis
6.5 Summary and conclusion
Appendix 6.1 The principle of arbitrage valuation
Bibliography
7 Evaluating the Investment Management Process and Decomposing Performance
7.1 The steps in constructing a portfolio
7.1.1 Asset allocation
7.1.2 Stock picking
7.2 Performance decomposition and analysis
7.2.1 Fama's decomposition
7.2.2 Performance decomposition corresponding to the stages in the investment management process
7.2.3 Technique of replicating portfolios for performance measurement
7.2.4 Comparison between the different performance decomposition methods
Bibliography
8 Fixed Income Security Investment
8.1 Modelling yield curves: the term structure of interest rates
8.1.1 Yield to maturity and zero-coupon rates
8.1.2 Estimating the range of zero-coupon rates from the range of yields to maturity
8.1.3 Dynamic interest rate models
8.2 Managing a bond portfolio
8.2.1 Quantitative analysis of bond portfolios
8.2.2 Defining the risks
8.2.3 Factor models for explaining yield curve shifts
8.2.4 Optimising a bond portfolio
8.2.5 Bond investment strategies
8.2.6 International fixed income security investment
8.3 Performance analysis for fixed income security portfolios
8.3.1 Performance attribution in comparison with a benchmark
8.3.2 The Lehman Brothers performance attribution model
8.3.3 Additive decomposition of a fixed income portfolio's performance
8.3.4 International Performance Analysis (IPA)
8.3.5 Performance decomposition in line with the stages in the investment management process
8.3.6 Performance decomposition for multiple currency portfolios. 8.3.7 The APT model applied to fixed income security portfolios
8.3.8 The Khoury, Veilleux and Viau model
8.3.9 The Barra model for fixed income security portfolios
8.3.10 Decomposition with hedging of the exchange rate risk
Bibliography
Conclusion
Index