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

by Richard O. Michaud (Author) "Markowitz (1959) mean-variance (MV) efficiency is the classic paradigm of modern finance for effeciently allocating capital among risky assets..." (more)
Key Phrases: resampled efficiency, defining investment policy, resampled efficient frontier, Monte Carlo, Annualized Return Premium Standard Deviation, Percent Simultaneous Confidence Intervals (more...)

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.


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Product Details

• Hardcover: 152 pages
• Publisher: Oxford University Press, USA (August 16, 2001)
• Language: English
• ISBN-10: 0875847439
• ISBN-13: 978-0875847436
• Product Dimensions: 9.6 x 6.4 x 0.8 inches
• Shipping Weight: 1 pounds (View shipping rates and policies)
• Average Customer Review: 3.3 out of 5 stars See all reviews (11 customer reviews)
• Amazon.com Sales Rank: #839,349 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

16 of 16 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)

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.

14 of 14 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 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...

4 of 4 people found the following review helpful:

4.0 out of 5 stars Raises important questions, February 12, 2002

By	James Damschroder (Ft. Collins, CO United States) - See all my reviews (REAL NAME)

Michaud raises several important issues that one is sure to encounter in portfolio optimization. Michaud exposes the fallibility of mean-variance optimization and suggests several techniques to obtain more reliable results. His conclusions merit consideration. Props for increasing the breadth of statistical scope of efficient asset management. Michaud is also a fluid writer. My largest complaint is that the majority of his work utilizes sign-constrained (long-only) optimization. If you manage, advise or consult on portfolio management and you utilize optimization techniques or have considered them, you should become knowledgeable with the contents of this book...