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