E-Book Overview
As many other reviewers have indicated, this book is verbose and poorly organized, and clearly not written by people trained in mathematics. It seems pretty clear that the book is also written FOR the idiots, er, I mean, MBAs who manage mutual funds and pension funds. A tell: the authors use the bizarre approximation ln(1+x) = x (there is nothing bizarre about the approximation, but the use of the logarithm gives much simpler derivations of much more widely applicable results). Since everyone has a calculator with a ln button, and quantitatively inclined people can compute logs pretty quickly in their heads, this is an indication that the book is targeted to mathematically unsophisticated people. Not being one of these, I cannot tell if the book is useful for them. I can say that this is the second finance book I read (the first being an older edition of Hull's Options, Futures & Other Derivatives with Derivagem CD Value Package (includes Student Solutions Manual for Options, Futuresd Other Derivatives) (7th Edition), since my first finance project was developing a market impact model. Everything G&K had to say about market impact was either trivial or wrong, but they did refer to the very important paper of Almgren and Chriss. Read that, and be happier.
E-Book Content
Page iii Active Portfolio Management A Quantitative Approach for Providing Superior Returns and Controlling Risk Richard C. Grinold Ronald N. Kahn SECOND EDITION Page vii CONTENTS Preface xi Acknowledgments xv Chapter 1 Introduction 1 Part One Foundations Chapter 2 Consensus Expected Returns: The Capital Asset Pricing Model 11 Chapter 3 Risk 41 Chapter 4 Exceptional Return, Benchmarks, and Value Added 87 Chapter 5 Residual Risk and Return: The Information Ratio 109 Chapter 6 The Fundamental Law of Active Management 147 Part Two Expected Returns and Valuation Chapter 7 Expected Returns and the Arbitrage Pricing Theory 173 Page viii Chapter 8 Valuation in Theory 199 Chapter 9 Valuation in Practice 225 Part Three Information Processing Chapter 10 Forecasting Basics 261 Chapter 11 Advanced Forecasting 295 Chapter 12 Information Analysis 315 Chapter 13 The Information Horizon 347 Part Four Implementation Chapter 14 Portfolio Construction 377 Chapter 15 Long/Short Investing 419 Chapter 16 Transactions Costs, Turnover, and Trading 445 Chapter 17 Performance Analysis 477 Page ix Chapter 18 Asset Allocation 517 Chapter 19 Benchmark Timing 541 Chapter 20 The Historical Record for Active Management 559 Chapter 21 Open Questions 573 Chapter 22 Summary 577 Appendix A Standard Notation 581 Appendix B Glossary 583 Appendix C Return and Statistics Basics 587 Index 591 Page xi PREFACE Why a second edition? Why take time from busy lives? Why devote the energy to improving an existing text rather than writing an entirely new one? Why toy with success? The short answer is: our readers. We have been extremely gratified by Active Portfolio Management's reception in the investment community. The book seems to be on the shelf of every practicing or aspiring quantitatively oriented investment manager, and the shelves of many fundamental portfolio managers as well. But while our readers have clearly valued the book, they have also challenged us to improve it. Cover more topics of relevance to today. Add empirical evidence where appropriate