Customer Reviews

Modern Investment Management: An Equilibrium Approach

5 star:		(4)
4 star:		(2)
3 star:		(0)
2 star:		(0)
1 star:		(4)

 

 

Nicely written from a journalistic perspective but rather old fashioned. Many mistakes and deliberate false claims in order to suit product interests of Goldman Sachs. Examples:

In the chapter on asset liability management there is always an analytical case for equities. However the only reason is that GS does not allow duration as a choice variable. Otherwise beta (in their formula) would become one and the optimal equity allocation is zero. Accidental? I doubt it.

They also claim to have found (earlier) a better method than Stambaugh on dealing with missing data. However either you publish or you shut up.

Waste of time for serious quants

I am quite shocked by all of the poor reviews below. This text is actually very good, in that it address several topics that Grinold and Kahn do not, mainly utility theory (and its role in investor decision making), the international CAPM, and the Black-Litterman model. First, the presentation of the investment decision making process by Litterman from an economics (utility maximization) view point is right on target. Too often portfolio theory is simply presented in a pure mathematical finance format that, while teaching the mechanics, leaves the end user incapable of understanding the implications of the analysis they are performing. Additionally, Litterman's presentation of the international CAPM and universal hedge models are very well done and extremely important. Finally, the Black-Litterman model has become mainstream (it is incorporated into the Ibbotson software) and is completely ignored by Grinold!

I own both Litterman and Grinold, and if you can afford both I would buy both because Grinold does a nice job simply presenting the mathematics, but then so do so many other texts.

The boys at GSAM clearly wrote this book as an "alternative" to Grinold and Kahn and to help promote the group as the seek to raise assets.

Grinold and Kahn work at Barclays Global Investors, GSAM's biggest competitor, and they wrote a first-rate book on how to do quantitative management. Their book has become the standard, the must read, and is required by the CFA exam. This obviously bugged them to no end. It's no fun to see your biggest competitor getting tons of accolades. So they did what anyone with a big ego does: they wrote their own book, this book.

Only problem is this book STINKS. What's the matter with it you ask? It has no content. The boys at GSAM were so scared about divigulging anything that could help a competitor (or the market) that they didn't really want to SAY anything.

Now how do you not say anything but still write a book, you ask? Excellent question! The answer is you talk in infuriatingly broad generalities about very general topics.

For example, on the topic of how do you actually trade the portfolio, they come up with such gems of wisdom as:

"Tradomg is the process of executing the orders derived in the portfolio constrution step. To trade a list of stocks efficiently, investors must balance opportunity costs and execution price against market impact costs." [page 431]

This knowledge anyone who has ever thought for 2 seconds about trading knows. The real value might come if they gave you some cool way to think about measuring opportunity costs, ex-ante. Or a nice way of estimating market impact costs. Do they do either? Of course not! Just more and more banal talk.

The book is filled with millions of other examples. One should use a decay weight in estimating covariance matrices. How should we choose that decay weight is of course never mentioned or discussed!

They tell us when choosing between factors to predict returns, "the real challenge is to winnow down the list of factors to a parsimonious set." Okay, how might I do that you GSAM gods? They never ever tell you [see page 420]

You get the point, just lots of blather and really no content.

Save your money and don't buy this book. They don't need your money they have enough already. And it's not like you are getting knowledge or anything valuable in return.

I used this book in 2006 at Fordham Graduate School of Business.
Chapter One: This topic helps to build a foundation toward understanding, how supply and demand determine the price of securities and why price tends to gravitate toward a point called equilibrium.

Chapter Two: the key to optimal portfolio construction is to understand risk in the portfolio and deploy risk effectively. We can achieve an increased return by recognizing situations in which adjusting the size of the risk allocation would improve the expected return of the overall portfolio. Letterman explains that risk is not to be avoided. In fact wealth creation depends on taking risk, followed by distributing that risk into an assortment of assets in order to minimize the potential for loss.

Chapter Three In discussing risk management Letterman highlights, that, the purpose of risk management function is not to minimize risk, but rather is to watch over the concentration and sources of risk in order to make sure that they match our preferences. As individuals' become more experienced with risk management controls, they build confidence to take on greater risk, thus generating higher returns. Remember, investment portfolio risk is essential to drive returns.

Every investment plan should contain an asset allocation and a risk budget. Letterman explains that we should view risk as a scare resource, and budget the risk in the portfolio to accommodate losses. Since investor have different preferences' some will be able to accept larger losses than others.

Bob Littetman, once again explains better than anyone else one of the many approaches to measure risk. Always careful to explain the pros and cons and the fact that these measures are but one more way to enable management to view risk from various perspectives, evaluate them all and then take action. This is a must read book for risk management, analysts, quants and others involved in or interested in measuring portfolio risks.
Congratulations!

This book provides essentially what it promises- a useful discussion of the equilibrium approach with some description of the methods applied by GSAM. The preface explicitly states that the intent of the authors was to exclude all proprietary information and they appear to have been successful in their endeavor while still providing some insight into application. I found the sections on Theory and Risk Budgeting, in particular, to provide thoughtful coverage of those topics in light of the authors' stated goals.

...there were just too many undeserved one-star reviews here. As mentioned by other reviewers, this book competes for shelf space with Grinold and Kahn's "Active Portfolio Management"; and, I might add, with Meucci's "Risk and Asset Allocation". The latter book is really beneath any reviewing (I am determined not to write any negative reviews anymore). G&K is aimed at business majors and MBAs. It has a lot of insight, but is written in the style of "C++ for dummies", and if you're in that kind of book, suit yourself. On the other side, the goal of Litterman's book (since this really is his book) is to showcase the expertise of GSAM's team members when it was a true giant of asset management, i.e., after Asness' departure and before Carhart's. In this and other respects, I think it succeeds. It is informative, with much breadth and sufficient depth. At 600 pages in type-10 font, the book is well over twice the size of G&K, and it is far less self-referential. The exception is Black-Litterman, which receives a disproportionate coverage; on the flip side, this is a good source to understand the intuition of this approach. I have read 6 chapters out of 32. Of them, the most technical ones, like "Covariance Matrix Extimation", "Equity Risk Factor Models", and "Return Attribution", make for very good references. They are not detailed and precise enough to allow a practitioner to implement a risk model or an attribution system, but are sufficient to understand how to use one. Summing up: there are not many books on this subject, and none of the ones available is perfect. This one is at least a good reference, and is written by qualified professionals with practical experience of the subject matter. One can't ask for much more.

While I'm sure the concepts and math are spot on, I dare you to try and glean useful information from this book in a timely fashion. Litterman uses a wordy nonspecific writing style that not only wastes your precious reading time, but also obscures the meaning so completely that you will find yourself rereading over and over until you throw the book down in exasperation.

Check this gem "Let us adopt some notation and look further into this example. Let delta be the marginal contribution to the risk of the portfolio on the last unit invested in an asset"

1. The first sentence is totally useless, as if I needed to be asked it we could start using notation. I know this is nit picky, but this kind of thing is prevalent and again wastes time and obscures important ideas.

2. The second sentence has four daisy chained prepositional phases, not totally unreasonable, but inefficient for sure; these coupled with vague wording like "marginal contribution" and "last unit invested" definitely slow down the speed readers. How about this instead: "Let delta be the change in portfolio risk due to a dollar change in an asset." (This book should be 250 pages instead of 500)

Most of the equations follow the same theme. Variable choices are showy, so it looks like your doing differential equations instead of algebra (at least at the beginning, I just can't muster the strength to continue)

I'm not reading this book anymore, there's got to be something better out there.

Dustin

A couple of chps from here are reqd reading for the CFA Level III exam (last exam for CFA charter). I was expecting something MUCH better from GSAM who fancy themselves as the best on the street.

Thankfully, CFAI provided us with the chps and we did not have to purchase the book. Save your money and buy Grinold instead.

My highest commendations to the asset management team at Goldman Sachs. They have come together and created a highly comprehensive tome that covers all the bases within the realm of modern investment theory. Their solid equilibrium approach is applied to all areas, from traditional investments to alternative asset classes, from institutional funds to private wealth, using analysis and real world applications. Incredibly thorough, extremely recommended.