Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation [Hardcover]

Richard O. Michaud (Author)

Book Description

ISBN-10: 0875847439 | ISBN-13: 978-0875847436 | Publication Date: June 15, 1998 | Edition: First Printing

The failure of optimized portfolios to meet their practical investment goals has prompted many portfolio managers to abandon optimization techniques for simpler alternatives to maximize asset value. Yet, according to financial expert Richard Michaud, readily available methods exist to help practitioners reduce instability and enhance the value of optimization--tools that the investment community has largely ignored. In his succinct new book, Michaud argues that the problems lies with the conventional perception of optimization as a numerical computation; this view has severely restricted the typical manager's understanding of inherent limitations--and resulted in optimized portfolios that frequently fall short of their potential. If, instead, managers approach optimization as a statistical estimation, Michaud argues, they can resolve many of the serious limitations. Michaud identifies and explains five powerful techniques--improved estimation, application of benchmark priors, integration of active forecasts, tests for efficiency, and tests for portfolio weights--that portfolio managers can use to reduce errors, increase precision, and enhance the value of seemingly optimized portfolios. He illustrates the impact of each method with a simple asset allocation problem. With its important implications for investment practice, Efficient Asset Management's highly intuitive yet rigorous approach to defining optimal portfolios will appeal to investment management executives, consultants, brokers, and anyone seeking to stay abreast of current investment technology. Through practical examples and illustrations, Michaud updates the practice of optimization for modern investment management.

Editorial Reviews

Amazon.com Review

In spite of theoretical benefits, Markowitz mean-variance (MV) optimized portfolios often fail to meet practical investment goals of marketability, usability, and performance, prompting many investors to seek simpler alternatives. Financial experts Richard and Robert Michaud demonstrate that
the limitations of MV optimization are not the result of conceptual flaws in Markowitz theory but unrealistic representation of investment information. What is missing is a realistic treatment of estimation error in the optimization and rebalancing process.

The text provides a non-technical review of classical Markowitz optimization and traditional objections. The authors demonstrate that in practice the single most important limitation of MV optimization is oversensitivity to estimation error. Portfolio optimization requires a modern statistical
perspective. Efficient Asset Management, Second Edition uses Monte Carlo resampling to address information uncertainty and define Resampled Efficiency(TM) (RE) technology. RE optimized portfolios represent a new definition of portfolio optimality that is more investment intuitive, robust, and
provably investment effective. RE rebalancing provides the first rigorous portfolio trading, monitoring, and asset importance rules, avoiding widespread ad hoc methods in current practice.

The Second Edition resolves several open issues and misunderstandings that have emerged since the original edition. The new edition includes new proofs of effectiveness, substantial revisions of statistical estimation, extensive discussion of long-short optimization, and new tools for dealing with
estimation error in applications and enhancing computational efficiency. RE optimization is shown to be a Bayesian-based generalization and enhancement of Markowitz's solution. RE technology corrects many current practices that may adversely impact the investment value of trillions of dollars under
current asset management. RE optimization technology may also be useful in other financial optimizations and more generally in multivariate estimation contexts of information uncertainty with Bayesian linear constraints.

Michaud and Michaud's new book includes numerous additional proposals to enhance investment value including Stein and Bayesian methods for improved input estimation, the use of portfolio priors, and an economic perspective for asset-liability optimization. Applications include investment policy,
asset allocation, and equity portfolio optimization. A final chapter includes practical advice for avoiding simple portfolio design errors.

A simple global asset allocation problem illustrates portfolio optimization techniques. The presentation is intuitive, rigorous and informed with institutional management experience to appeal to investment management executives, consultants, fund trustees, brokers, academics, and anyone seeking to
stay abreast of the future of investment technology.

With its important implications for investment practice, Efficient Asset Management's highly intuitive yet rigorous approach to defining optimal portfolios will appeal to investment management executives, consultants, brokers, and anyone seeking to stay abreast of current investment technology.
Through practical examples and illustrations, Michaud and Michaud update the practice of optimization for modern investment management. --This text refers to the Kindle Edition edition.

Review

"Michaud focuses on the fact that sampling errors in input estimates can have extreme effects on the portfolios produced by a mean-variance analysis. While some may debate his conclusions, everyone should understand the problem as Michaud so ably presents it and his proposed solution to it. This is a must-read, must-think-about book."--Harry M. Markowitz, Nobel Laureate, Economics, 1990

"In his long-standing tradition, Michaud once again pushes the envelope of mean-variance optimization. Quantitative analysts of all stripes will enjoy his work. Resampling is bound to be of growing interest."--Kenneth L. Fisher, Chairman & CEO, Fisher Investments, Inc.;Forbes Portfolio Strategy Columnist; and MarketPlace Commentator, Public Radio International

"Efficient Asset Management is essential reading for all investment managers. Michaud persuasively and eloquently shows that portfolio management is an inherently statistical task and is therefore subject to significant sampling error. More important, he provides a new tool, the resampling efficient frontier, for mitigating the problem. Michaud's tour de force is a rare example of a product with genuine merit for all investors."--Richard Roll, Allstate Chair in Finance and Insurance, John E. Anderson Graduate School of Management, UCLA

"This book is a delightfully sophisticated yet practical introduction to portfolio management that will appeal to industry professionals as well as finance students."--Andrew W. Lo, Harris & Harris Group Professor and Director of the Laboratory for Financial Engineering, MIT

"Efficient Asset Management offers an exciting and innovative approach to asset construction that builds on the established literature. It provides the practitioner with a new dimension for incorporating value-added investment judgments in the portfolio-building process. Readable and useful, this book makes a significant contribution to better portfolio management."--Gary P. Brinson, President, Brinson Partners, Inc.

See all Editorial Reviews

Product Details

• Hardcover: 152 pages
• Publisher: Oxford University Press, USA; First Printing edition (June 15, 1998)
• Language: English
• ISBN-10: 0875847439
• ISBN-13: 978-0875847436
• Product Dimensions: 9.6 x 6.4 x 0.8 inches
• Shipping Weight: 1 pounds
• Average Customer Review: 3.3 out of 5 stars  See all reviews (11 customer reviews)
• Amazon Best Sellers Rank: #1,419,335 in Books (See Top 100 in Books)

More About the Author

Discover books, learn about writers, read author blogs, and more.

Customer Reviews

Most Helpful Customer Reviews

18 of 18 people found the following review helpful:

3.0 out of 5 stars Not for the asset allocation user (vs. creator), August 28, 2002

By 

Ronald Byrd (Sacramento, CA USA) - See all my reviews
(REAL NAME)   

Amazon Verified Purchase

This review is from: Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation (Hardcover)

I would agree with the comments of the first 2 reviewers. That is, the book is honest, concise and thorough in addressing the pitfalls of using Mean-Variance optimization techniques for finding optimum asset allocations (i.e., minimum risk for given expected return). However, if you don't do your own asset allocation calculations (i.e., process historical trends to find the "efficient frontier") the only value of the book is to make you aware of the issues around using Markowitz mean-variance techniques and, therefore, be questioning of any asset allocation models you come across. In other words, for the user (vs. creator) of asset allocation models be aware that if the creator wasn't careful in his statistical techniques the models could be wrong. Also, what I also got out of the book was, in many cases, rebalancing of a portfolio may not be needed as frequently as many suppose as the efficient frontier is more of a cloud then a line.

15 of 15 people found the following review helpful:

4.0 out of 5 stars all you ever wanted to know..., July 21, 2001

By 

Louis Charbonneau (Montreal, Canada) - See all my reviews

This review is from: Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation (Hardcover)

This short, simple book offers a synthesis of research about the uses and practical problems associated with Markowitz optimization procedures. It will give you a good opportunity to see in a few interesting hours what can go wrong in implementing MV optimization and what to do to improve the process. Things that are relatively obscure, but have a direct practical relevance, such as considering the efficient frontier as having a variance, and offering some pointers on where to get arcane Stein-like estimators for the variances and covariances (Ledoit estimators).

There is no math entrance barrier (almost no equations), so this book will be of benefit to users of MV optimization who want to understand the issues deeper and not just press on a button and assume that the weights they get make sense. It is to be noticed that this is not the book for those interested in quadratic programming algorithms per se, as the focus is more from a user point of view. Also notice there are no new results in the book and that sometimes I wished some discussions were more detailed - but they may be too detailed for some other readers as well.

In brief an honest book, not too dumb and not too hard. An interesting and useful reading for all users of MV optimization. Also, a perfect book to complement an undergrad education in finance.

NOTE: Although the presentation, printing and binding is similar to the infamous NYSE "technical" books or Wiley trader's advantage series, this is actually a good vulgarization book written by somebody having an academic training. No chaos, technical analysis or other arbitrary opinions are to be found here. In case you'd be scared by the look of it...

3 of 3 people found the following review helpful:

4.0 out of 5 stars Important information when considering Markowitz optimization, May 12, 2007

By 

B. Peterson (Chicago, IL USA) - See all my reviews
(REAL NAME)   

This review is from: Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation (Hardcover)

Michaud's resampling methodology is quite rigorous, although the patentability of application of econometric concepts that are over 40 years old to a theory advanced by Markowitz in 1952 should be seriously questioned by any rational reader. The applicability of resampling and improvements to the inputs to estimation are clear, and should be strongly considered by anyone in the asset management industry. The book glosses over other approaches to optimization that are not based on Markowitz, all but ignoring the huge body of literature that has been built up around other optimization approaches. Except for this shortfall, this is an excellent book, and shoulds be a part of your library on quantitative asset management.