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Frontiers of Modern Asset Allocation Hardcover – December 27, 2011

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Editorial Reviews

From the Inside Flap

Paul D. Kaplan has been right in the middle of these developments. First as a researcher for Ibbotson Associates and now for Morningstar, Dr. Kaplan has published dozens of articles and research papers over the past fifteen years that dig deeply into analyzing the moving parts of portfolio creation. In addition to pushing the asset-allocation debate forward with his research, Dr. Kaplan has helped develop products and tools for institutions, financial advisors, and individual investors that have made it practical to put the concepts of asset allocation into everyday use.

In Frontiers of Modern Asset Allocation, Dr. Kaplan brings together twenty-seven of his best articles and interviews. He divides the book into four parts—Equities; Fixed Income, Real Estate, and Alternatives; Crashes and Fat Tails; and Doing Asset Allocation—examining everything from how asset classes should be defined to whether they should be represented by market value–weighted indexes or other principles. The book also includes interviews with industry luminaries who have greatly influenced the evolution of asset allocation, including Markowitz, Roger Ibbotson, and the late Benot Mandelbrot. Frontiers of Modern Asset Allocation is essential reading for institutional investors, wealth managers, financial planners, and academics. It includes three appendices that put theory into action with technical details for new asset-allocation frameworks, including the next generation of portfolio construction tools, which Dr. Kaplan dubs "Markowitz 2.0," in honor of the father of Modern Portfolio Theory.

From the Back Cover

Praise for Frontiers of Modern Asset Allocation

"This is a book where theory meets practice and results in innovation. Some of Paul's research challenges commonly used asset-allocation methodologies and offers investors interesting alternatives. A most interesting read."
Bruno Solnik, Professor of finance, Hong Kong University of Science and Technology and HEC Paris

"The foundations of MPT, though solid, are desperately in need of updating to reflect modern market dynamics. Paul does exactly that while taking time to shatter myths along the way. Read this book and you will have in your possession modern tools masterfully applied to asset allocation relevant to today's investors."
Rodney N. Sullivan, CFA, Editor, Financial Analysts Journal, CFA Institute

"This book by Paul Kaplan is a most unusual, and worthwhile, mix of practitioner wisdom and academic rigour, topped with some excellent interviews and debates; highly recommended."
Dr. Steve Satchell, Fellow, Trinity College, University of Cambridge

"Paul Kaplan's state-of-the-art research on asset allocation has been instrumental in resolving many of the issues that face practitioners. In Frontiers of Modern Asset Allocation, Paul brings much of his work together to walk the reader through the evolution of asset allocation toward a better understanding of its state in today's markets."
Brian Singer, CFA, Head of Global Macro Strategies, William Blair & Company, LLC

"The breadth and depth of the articles in this book suggest that Paul Kaplan has been thinking about markets for about as long as markets have existed."
From the Foreword by Laurence B. Siegel

In 1952, the economist Harry Markowitz introduced a now-commonplace concept: investors can construct an "efficient portfolio" by investing in diverse securities combined to maximize expected returns while minimizing expected volatility. Markowitz revolutionized investing. Ever since, the idea of asset allocation has been the bedrock of constructing portfolios. The pursuit of finding a portfolio's sweet spot—the optimal area where various asset classes work in conjunction to provide the most returns for the least risk—has given rise to an incredible body of research and range of products.


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Product Details

  • Hardcover: 384 pages
  • Publisher: Wiley; 1 edition (December 27, 2011)
  • Language: English
  • ISBN-10: 1118115066
  • ISBN-13: 978-1118115060
  • Product Dimensions: 6.3 x 1.3 x 9.3 inches
  • Shipping Weight: 1.4 pounds (View shipping rates and policies)
  • Average Customer Review: 4.6 out of 5 stars  See all reviews (5 customer reviews)
  • Amazon Best Sellers Rank: #501,773 in Books (See Top 100 in Books)

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11 of 11 people found the following review helpful By Robert Martorana on February 8, 2012
Format: Hardcover
"Historical statistics should not be blindly fed into an optimizer."

This quote summarizes the spirit of this book by Paul D. Kaplan, Ph.D. the Director of Quantitative Analysis at Morningstar. I published a full review of this book here on [..] on February 8, 2012: [..]

Below are some excerpts from this review.

The book covers a wide range of topics that span two decade's of Kaplan's research. The 27 chapters are organized in four sections:
1. Equities (index construction, small-stock betas, etc.)
2. Fixed income, Real Estate, and Alternatives
3. Crashes and Fat Tails
4. Doing Asset Allocation

Markowitz and Optimization
I found Kaplan at his best when discussing asset allocation, the fourth section of the book. He begins with a brief overview of Modern Portfolio Theory, which was based on the 1952 paper by Harry Markowitz. This pioneering work on asset allocation, uncertainty, and diversification led to Modern Portfolio Theory (MPT), and to the efficient frontier, which shows the trade-off between risk and return as a series of optimal portfolios. MPT also led to portfolio optimization, also called Mean Variance Optimization (MVO), and to the "fish hook" charts that adorn many client presentations.

The Limitations of Mean Variance Optimization
Anyone who has worked with portfolio optimization knows that the results are extremely sensitive to the inputs. This leads to "estimation errors," a wonderful euphemism for what could be an investment catastrophe. Consequently, Kaplan emphasizes the importance of the assumptions for expected returns, standard deviation, and the correlation of asset classes. He repeatedly notes that optimizers are extremely sensitive to these assumptions.
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2 of 3 people found the following review helpful By investingbythebooks on January 12, 2013
Format: Hardcover
Paul Kaplan is one of the more innovative thinkers in finance. After leaving Northwestern University Kaplan has spent over two decades at Ibbotson Associates and later Morningstar - after they bought Ibbotson - currently as the research director for Morningstar Europe. Kaplan's thinking spans over almost any topic in finance apart from perhaps individual security selection. Kaplan's eclectic thinking is on full display in this book that collects a number of the author's best papers grouped under a number of headlines.

It's impossible to cover all the topics in the book. However, a few papers stand out. One is "The Long and Short Commodity Indexes" where the author presents a convincing argument that commodity futures' indexes' should be constructed as long-short-indexes instead of normal long-only-indexes. With a rule based trend following long-short strategy the index can reap the benefits of markets that are both in backwardation and in contango. A few texts cover fundamental indexes. One pleasant feature in this book is that a number of papers on the same topic often are rounded up by a debate. A discussion between Kaplan and Robert Arnott of Research Affiliates ends the topic of fundamental indexes. Consensus is reached on that these might be effective strategies as they combine a value reweighting of the index constituents with a flexibility to increase or decrease the bet that is taken versus a market cap weighted index depending on the grade of over- or undervaluation, but they do not represent a new way to define the equity market per se.

Arguably, the most important paper in the book is Markowitz 2.0 (also discussed by Harry Markowitz and Sam Savage with Kaplan as the moderator).
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2 of 3 people found the following review helpful By ND on April 10, 2012
Format: Kindle Edition
This is definitely one of the better investment books I've read on investing.

The book is a series of short essays on various topics compiled in to an easy to read book. It's quantitative (all of the math is explained) but you can easily skip this if you feel like and just read the explanations.
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Format: Hardcover Verified Purchase
This is a fabulous book for those interested in the details of quantitative analysis of investor and market behavior. While fascinating, I can not state that there was anything inherent that prompted me to change my direction.
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Format: Kindle Edition
I enjoyed the book and found it to be a practical read for institutional asset allocators. Kaplan and his colleagues illuminate the investment issues faced and solutions offered by some of the brightest minds in the industry.
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