Portfolio Construction and Risk Budgeting

CONTENTS This book aims at providing a comprehensive treatment of alternative portfolio construction techniques ranging from traditional mean variance and lower partial moments based methods over Bayesian techniques to more recent developments as portfolio resampling or stochastic programming solutions using scenario optimization. 1. Traditional Portfolio Construction: Selected Issues - Starts with a review of Markowitz based solutions with a particular focus on issues that are of concern to practitioners but rarely treated in conventional textbooks. These involve asset liability management, clustering to redefine the investment universe, treatment of illiquid asset classes, life cycle investing, time varying covariances and implied return analysis. 2. Incorporating Deviations from Normality: Lower Partial Moments - Moves away from the classical model introducing non-normality. It will provide a toolkit to judge when non-normality is a problem and when it is not. Lower partial moment based portfolio construction is carefully discussed introducing all mathematical tools needed to optimally apply this important technique to real world portfolio problems. 3. Portfolio Resampling and Estimation Error - Introduces estimation error and how to heuristically deal with it using either portfolio resampling or constrained optimization. A particular focus is given to the concept of resampled efficiency recently introduced into the literature as an increasing number of investors get interested into this particular form of dealing with estimation error. 4. Bayesian Analysis and Portfolio Choice - Deals with estimation error from a more conventional angle reviewing various Bayesian techniques. A special focus is given on data problems, particularly on how to treat time series of different length as this is one of the main data problems faced by practitioners. 5. Scenario Optimisation - This chapter is a natural extension of all four previous chapters. It will describe the most general form of portfolio optimization that can simultaneously deal with data problems (estimation error, time series of different length) as well as with non-linear instruments, non-normal distributions and non-standard preferences. 6. Portfolio Construction with Transaction Costs deals with the most overlooked problem in practical portfolio construction: transaction costs. It shows how various forms of transaction costs can be incorporated into the portfolio construction process. 7. Benchmark-Relative Optimisation - Leaves the world of asset allocation and reviews key concepts in making benchmark relative decisions. Again focus is given to problems rarely handled in traditional textbooks such as implicit funding assumptions and risk decomposition, multiple benchmark optimization, tracking error and its forecasting ability or tracking error efficiency versus mean variance efficiency. 8. Core-Satellite Investing: Budgeting Active Manager Risk - Concludes on budgeting active manager risk providing the mathematical tools to address questions like "how much active? " "Where to be active? " or "Is core satellite investing superior to enhanced indexing? "