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The New Science of Asset Allocation: Risk Management in a Multi-Asset World Hardcover – March 8, 2010
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From the Inside Flap
While in most instances asset allocation failed to protect investors from devastating losses in 2007 and 2008, it remains an essential element of the investment decision. Asset allocation is not solely about maximizing expected return. Much of asset allocation is based on the tradeoffs between the costs and returns that are consistent with an investor's risk tolerance or investment goals. Today the challenge is greater than ever, not only because we are working in a more dynamic market but because the number of investment vehicles available to investors has increased as well. The New Science of Asset Allocation provides expert guidance with a fresh approach designed to meet this challenge.
The authors, each a prominent industry leader, first focus on risk, examining the principal tools associated with quantitative and qualitative analysis in determining fundamental asset and portfolio risk, as well as the ability of money managers to create value. While pointing out the importance of manager discretion in the asset allocation process, they also present solutions, which emphasize systematic approaches to capturing expected returns while limiting downside risk. They provide illustrative examples of an investor's decision-making process in moving between and among core and satellite portfolios and offer an overview of sample allocations and expected risk/return scenarios.
While most books on asset allocation continue to emphasize the return and risk characteristics of traditional stock and bond investments, The New Science of Asset Allocation details major forms of alternative investments—their source of returns, their inherent risks, and their recent performance—including hedge funds, managed futures, private equity, real estate, and commodities. The book focuses on several practical techniques that can be used to measure, monitor, and manage the risk of a portfolio, stressing throughout that the road to a balanced portfolio through time comes from actively monitoring and managing risk. In addition, the expert authors identify investment myths that have become working beliefs in asset allocation—such as that diversification across equity issues or countries is sufficient, or that superior managers do not exist—and debunk each one with solid research.
Asset allocation remains a cornerstone of prudent investment management, and through the new approach presented in The New Science of Asset Allocation, you'll discover how to make it work.
From the Back Cover
Praise for The New Science Of Asset Allocation
"Investing is all about keeping an open mind as to different ways of seeing the world. The authors have succeeded in compiling an insightful view of asset allocation that should go down as a landmark in this field."
—Eric R. Breval, Managing Director, AVS (Swiss Federal Social Security Fund)
"This book balances the theoretical with the practical. It is the latter feature—the practical guidance —that makes it required reading for all pension fund fiduciaries."
—Oliver Mitchell, Jr., A-E-F-C Pension Fund, the American Bar Association
"The market turmoil following September 2008 offers us the opportunity to rethink and challenge conventional ideas regarding asset allocation. This book offers a new look at the asset allocation process covering both quantitative and qualitative aspects of the process. This book stresses the importance of discretion in the process and highlights the broad range of asset classes investors should consider to provide the right balance between risk and return."
—William Dinning, European Head of Investment Strategy and Economics, AEGON Asset Management
"The New Science of Asset Allocation is a timely and important book for the future role of alternative investments, within investments portfolios. The Myths of Asset Allocation are a must-read for scholars and investors alike."
—Talal O. Malas, Head of Investments, Infinity Capital SAM, Monaco
"The authors bring clarity to the complexity of structuring (and managing) a multi-asset portfolio; illuminating the many misconceptions and limitations of yesterday's and today's methodologies and in the process argue convincingly that the addition of alternative assets, when properly understood and applied, can offer significant overall risk and return advantages."
—E. Craig Asche, President and CEO, Chartered Alternative Investment Analyst Association
"This publication is a veritable reference in the area of asset allocation and risk management. Clear, accurate, and illustrated with relevant practical examples, it will allow practitioners to benefit from an effective detailed summary produced by recognized asset management experts."
—Noël Amenc, Professor of Finance, Director of the EDHEC-Risk Institute.
"This book is an excellent, rigorous reference to today's critical issues in asset allocation. A 'must-have' for any large, sophisticated investor."
—Jane Buchan, Chief Executive Officer, Pacific Alternative Asset Management Company
"The New Science of Asset Allocation offers fresh, brutally honest insights and quantitatively rigorous guidance on how to measure and budget risk from an experienced group that reminds us that judgment and common sense also matter."
—Maureen E. O'Toole, Managing Director, Citi Private Bank
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Top customer reviews
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The book did have some bright spots. It does a good job of pointing out the weaknesses of many conventional benchmarks and wisely counsels investors to understand how each index is constructed. Further, I liked the idea of an asset allocation text that emphasizes on risk management, although the depth of treatment left a lot to be desired. It was surprising, for example, to see so little coverage of stress testing given the multiple mentions of risk in the book. Nonetheless, the book did effectively point out there is more to risk management than simply measuring volatility (especially if volatility is changing over time).
That said, the book has its virtues. The chapter on the "Myths of Asset Allocation" shows that the authors have some depth of insight into the foibles and misunderstandings that surround asset allocation. The book also goes into the importance of qualitative analysis of managers, looking up from the numbers so that you can avoid allocating money to the next Madoff. It also describes the use of derivatives in order to control risk exposures.
Each chapter ends with a short summary of the takeaways from the chapter, which serves to reinforce the points of the book.
Though the book has the word "new" in the title, I did not find much new in it. If one is looking for novel implementation methods for asset allocation, best to look elsewhere.
Who would benefit from this book?
This is not a book for average investors. It is for professionals who want to brush up their asset allocation skills, and young professionals wanting insight into asset allocation.