Today’s modern portfolio theory is not your father’s MPT. It has undergone many changes in the past fifty years. Indeed, a new understanding of MPT has emerged, one that has a significant impact on managing asset allocation—especially in today’s turbulent markets. Dynamic Asset Allocation interprets and integrates the developments in modern portfolio theory: from the efficient-market hypothesis and indexing of decades past to strategies for building winning portfolios today. The book is filled with practical, hands-on advice for investors, including guidance on approaching investment as a risk-management task.
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"Picerno's look at modern portfolio theory's evolution offers a timely reminder that the design and management of asset allocation is still the critical element for successful investing."
— Harold Evensky, CFP
President, Evensky & Katz Wealth Management
"What Peter Bernstein did for the history of portfolio theory in Capital Ideas, Picerno does for its real-world application. He captures the nuanced soup of theory, markets, and investor behavior better than any other writer on investing."
— Patrick Geddes
Cofounder and Chief Investment Officer, Aperio Group
Former CFO and Director of Quantitative Research, Morningstar Inc.
"Picerno puts the tires to the pavement on Peter Bernstein's 2003 proclamation that the policy portfolio is dead. Picerno masterfully articulates the implications that follow from the notion that although the market portfolio may be efficient, markets may not be."
— Rodney N. Sullivan, CFA
Editor, Financial Analysts Journal at CFA Institute
"Dynamic Asset Allocation is cogently written in a very readable style. James Picerno presents readers with a wonderful history of the developments in asset allocation and then profides an excellent frameword for investors to utitilize the discipline of asset allocation in their own portfolio-composition process. Any serious investor will want to have this book in their library."
— Gary P. Brinson
President, GP Brinson Investments
About the Author
James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He currently contributes to trade magazines for financial professionals and financial advisers, edits The Beta Investment Report, and writes the finance blog, the Capital Spectator. He has written for Barron’s, Investment Advisor, Mutual Funds, and Bloomberg Markets.
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More About the Author
I'm an independent journalist focused on investment strategy, economics and econometric analysis of markets and the business cycle. I edit The Capital Specatator blog (capitalspectator.com) and write for various publications, ranging from Financial Advisor magazine to The Atlantic. I'm also the author of Dynamic Asset Allocation: Modern Portfolio Theory Updated For The Smart Investor (Bloomberg Press, 2010).
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12 of 13 people found the following review helpful
By David Merkel
Format:Hardcover
James Picerno writes the popular blog The Capital Spectator. One of his main topics is asset allocation. He has a book coming out in February called Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor.
Asset allocation is important. It determines much of the returns investors will receive.
This book goes into a long discussion of modern portfolio theory, and the author finds MPT to be valuable, but needs to be supplemented by other factors other than the market portfolio. Market capitalization, individual stock valuation, and overall market cheapness/dearness plays a role in asset allocation. This rectifies the main complaint of value investors regarding asset allocation, in that relatively lower prices should lead investors to allocate more to an asset class.
There are elements of my own view here, which says that asset allocation should look at sustainable yield levels adjusted for the likelihood of those yields occurring, and the potential for downside risk.
Also, the author spends time on the special situations of asset allocation for the individual or institution -- how old you are, or, what industry you are in. I experienced that at one firm I was at where I managed the profit sharing assets. We underweighted financials because our firm did well when financials did well. We did not want employees worrying about their assets if the firm was having a bad year.
I recommend the book, but it is not a popular book. Average people will not get a lot out of it. The book requires a moderate knowledge of finance to make it valuable to the reader.
Who would benefit from this book: those who have a strong interest in asset allocation, and like or are willing to tolerate a decent amount of academic discussion of modern portfolio theory. As academic views go, this is a better one. That said, many people will find this book a tough slog because they don't want to deal with the academic arguments.
Asset allocation is important. It determines much of the returns investors will receive.
This book goes into a long discussion of modern portfolio theory, and the author finds MPT to be valuable, but needs to be supplemented by other factors other than the market portfolio. Market capitalization, individual stock valuation, and overall market cheapness/dearness plays a role in asset allocation. This rectifies the main complaint of value investors regarding asset allocation, in that relatively lower prices should lead investors to allocate more to an asset class.
There are elements of my own view here, which says that asset allocation should look at sustainable yield levels adjusted for the likelihood of those yields occurring, and the potential for downside risk.
Also, the author spends time on the special situations of asset allocation for the individual or institution -- how old you are, or, what industry you are in. I experienced that at one firm I was at where I managed the profit sharing assets. We underweighted financials because our firm did well when financials did well. We did not want employees worrying about their assets if the firm was having a bad year.
I recommend the book, but it is not a popular book. Average people will not get a lot out of it. The book requires a moderate knowledge of finance to make it valuable to the reader.
Who would benefit from this book: those who have a strong interest in asset allocation, and like or are willing to tolerate a decent amount of academic discussion of modern portfolio theory. As academic views go, this is a better one. That said, many people will find this book a tough slog because they don't want to deal with the academic arguments.
1 of 1 people found the following review helpful
By eqtbooks
Format:Hardcover
James Picerno is a journalist who has been writing about finance for more than twenty years. Well, he sure picked up a lot of things on the way. Apart from a whole lot of knowledge he acquired a religion, the faith of Modern Portfolio Theory (MPT) and its belief in efficient markets in equilibrium. This book is one part biased chronological odyssey of academic papers on portfolio theory and one part useful discussion on how to compose a multi asset portfolio.
The first five chapters give the reader an overview of the development of the academic field of portfolio theory, but it doesn't begin with Harry Markowitz's Portfolio Selection in 1952 as would be customary. Picerno instead begins two decades earlier with the 1934 publication of Ben Graham's and David Dodd's book Security Analysis and the notion that the return on an investment depends on the price you pay for it. An obvious statement that was for a long time forgotten by financial academia. After this the author introduces the standard building blocks of MPT with a) Markowitz's notion that investors want to optimize returns and risk (measured as volatility); b) James Tobin's Security Market Line; c) Bill Sharpe's conclusion that the market cap weighted portfolio of all assets is the optimal portfolio and d) Paul Samuelson's research on the randomness of securities prices that lead Eugene Fama to proclaim markets efficient.
Enter the 80's and cracks in MTP start to emerge with the discoveries of numerous so called anomalies and the papers showing that CAPM doesn't do the job. Hence the current religious war amongst rationalist and behavioural explanations starts. The author is buried in the trenches of the rationalists. He even tries to make the crash in 1987 and the TMT-bubble into "rational bubbles". Well if those events were rational the distinction between rationality and irrationality ceases to exist! The core of the defence is that anomalies are previously unexplained risk factors, that the huge swings in market prices aren't caused by irrational herding behaviour but of rational changes in risk premias due to differences in investors utility during varying economic conditions and that investors don't beat the market. My humble opinion is that if you have a thesis on how the world works and this turns out to be untrue, it's intellectually dishonest, and frankly a bit childish, to simply incorporate the new evidence in the original thesis and say that you were right all along. As the old saying goes "If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck." However, even if Picerno insists on calling the market animal a donkey he still goes on to giving good practical advice on how to treat the duck.
The nursing instructions include adjusting the strategic asset allocation according to investor's unique situation and risk tolerance, incorporating the notions of time varying volatilities and correlations, using multiple time periods (as opposed to Markowitz one period mean variance portfolio optimization model) but more importantly, they take Ben Grahams insight of time varying expected returns due to differences in valuation levels to heart to develop a practice of dynamic asset allocation. Picerno also extends this last insight to the premias earned on the anomalies, i.e. small caps, value stocks etc. Perhaps the discussion on what actually constitutes risk ought to have been expanded but the author should be commended for trying to show the reader a contour of how portfolios could be constructed in a post-Markowitz world.
Still, this book isn't really satisfactory. For those interested in how capital markets theory has developed I would recommend the late Peter Bernstein's Capital Idea's Evolved from 2007. The problem is that apart from Picerno's book I haven't come across one with a comprehensive framework for dynamic asset allocation. Does this motivate buying the book? Yes, perhaps.
This is a review by eqtbooks.com
The first five chapters give the reader an overview of the development of the academic field of portfolio theory, but it doesn't begin with Harry Markowitz's Portfolio Selection in 1952 as would be customary. Picerno instead begins two decades earlier with the 1934 publication of Ben Graham's and David Dodd's book Security Analysis and the notion that the return on an investment depends on the price you pay for it. An obvious statement that was for a long time forgotten by financial academia. After this the author introduces the standard building blocks of MPT with a) Markowitz's notion that investors want to optimize returns and risk (measured as volatility); b) James Tobin's Security Market Line; c) Bill Sharpe's conclusion that the market cap weighted portfolio of all assets is the optimal portfolio and d) Paul Samuelson's research on the randomness of securities prices that lead Eugene Fama to proclaim markets efficient.
Enter the 80's and cracks in MTP start to emerge with the discoveries of numerous so called anomalies and the papers showing that CAPM doesn't do the job. Hence the current religious war amongst rationalist and behavioural explanations starts. The author is buried in the trenches of the rationalists. He even tries to make the crash in 1987 and the TMT-bubble into "rational bubbles". Well if those events were rational the distinction between rationality and irrationality ceases to exist! The core of the defence is that anomalies are previously unexplained risk factors, that the huge swings in market prices aren't caused by irrational herding behaviour but of rational changes in risk premias due to differences in investors utility during varying economic conditions and that investors don't beat the market. My humble opinion is that if you have a thesis on how the world works and this turns out to be untrue, it's intellectually dishonest, and frankly a bit childish, to simply incorporate the new evidence in the original thesis and say that you were right all along. As the old saying goes "If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck." However, even if Picerno insists on calling the market animal a donkey he still goes on to giving good practical advice on how to treat the duck.
The nursing instructions include adjusting the strategic asset allocation according to investor's unique situation and risk tolerance, incorporating the notions of time varying volatilities and correlations, using multiple time periods (as opposed to Markowitz one period mean variance portfolio optimization model) but more importantly, they take Ben Grahams insight of time varying expected returns due to differences in valuation levels to heart to develop a practice of dynamic asset allocation. Picerno also extends this last insight to the premias earned on the anomalies, i.e. small caps, value stocks etc. Perhaps the discussion on what actually constitutes risk ought to have been expanded but the author should be commended for trying to show the reader a contour of how portfolios could be constructed in a post-Markowitz world.
Still, this book isn't really satisfactory. For those interested in how capital markets theory has developed I would recommend the late Peter Bernstein's Capital Idea's Evolved from 2007. The problem is that apart from Picerno's book I haven't come across one with a comprehensive framework for dynamic asset allocation. Does this motivate buying the book? Yes, perhaps.
This is a review by eqtbooks.com
Format:Hardcover|Amazon Verified Purchase
This is a good book for an overview of the historical evolution of portfolio management.
On the positive side, it summarizes what is important to consider on modern portfolio management, updated to current date.
On the negative side, the author is repetitive between chapters, the book could be half in size, but what really is missing is a more practical approach to implement the portfolio management strategy exposed.
On the positive side, it summarizes what is important to consider on modern portfolio management, updated to current date.
On the negative side, the author is repetitive between chapters, the book could be half in size, but what really is missing is a more practical approach to implement the portfolio management strategy exposed.
Most Recent Customer Reviews
3.0 out of 5 stars
Buy Graham instead
This book does have some good information and points in it. Overall though the author is just quoting from studies and offers very little original analysis. Read more
Published on March 22, 2010 by Robert Clark
2.0 out of 5 stars
Better suited for advanced readers
The history of portfolio theory's evolution is extensive and somewhat technical. Begginners will probably find that their eyes are glazing over while more advanced readers with a... Read more
Published on March 6, 2010 by Hubburt
Front Cover | Front Flap | Table of Contents | First Pages | Index | Back Flap | Back Cover | Surprise Me!
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