Here is a very readable and comprehensive book, produced by practitioner/academics Amenc and Le Sourd (Misys Asset Management Systems/Edhec). It is well suited as an MBA level investments course text, and the material is presented in a very accessible fashion for the practitioner. CFAs will especially appreciate this book as it references AIMR standards throughout (my rough count indicates more than 50 references to AIMR throughout the book, mainly in chapters 1, 2, 7 and 8). Francophiles may also especially appreciate the international flavor of many of the discussions.Chapter 1, "The Portfolio Management Environment", defines portfolio management and describes how it works in practice. Asset classes, including alternative investments, are first introduced. The distinction between passive and active management is reviewed, and then the investment management process is described in terms of strategic asset allocation, tactical asset allocation and security selection. Performance analysis is then covered with a nice discussion of market efficiency and an excellent review of the performance persistence literature.Chapter 2 focuses on performance analysis, and shows how to calculate both absolute and relative returns. Here, I found the introduction to the "Portfolio Opportunity Distributions" (POD) as developed by Surz to be fascinating, and along similar lines as the recent research by Kritzman and Page ("Asset Selection Versus Security Selection", 2003) which addresses one of the commonly misunderstood aspects of the Brinson et al 1986 and 1991 model, which decomposes historical performance and concludes that more than 90% of the variation in portfolio returns over time is related to asset allocation. As Kritzman and Page correctly note, "The Brinson et al studies and others like them present a joint test of investor behavior and capital market opportunities. They do not answer the question, which activity is more important: asset allocation or security selection, which is what we propose to do [by measuring the potential for dispersion]." In chapter 7 Amenc and Le Sourd also provide an interesting summary of one researcher's finding that 98% of subsequent writers on the topic have either misinterpreted or erroneously quoted the Brinson studies. The advantage of the POD approach is that it does not suffer from being a joint test of investor behavior and capital market opportunities, and as Amenc and Le Sourd describe, offers a plausible and useful way to potentially distinguish skill from luck in a manager's performance. Risk measurement is covered next, including introductory level discussions of VaR, extreme value theory and scenario analysis. The appendices to chapter 2 provide methods for calculating returns and descriptions of global market indices.Chapter 3 covers pre-CAPM MPT (the Markowitz 1952 model), with nice discussions of the critical line method, Wolf's 1959 simplex method, Sharpe's 1963 single-index model, and the Elton, Gruber and Padburg 1977 simplified method that employs the Treynor ratio. A useful appendix presents Merton's 1972 Lagrangian resolution of the efficient frontier. Chapter 4 covers CAPM pretty thoroughly, though Treynor 1962 is inaccurately referred to as a 1961 paper (as most of the literature also erroneously reports), Fama's 1968 clarification is ignored, and while Amenc and Le Sourd discuss Lintner's first exposition from February 1965 in the Review of Economics and Statistics, they inexplicably ignore the best Lintner paper (in my opinion), Lintner's second paper of December 1965 in the Journal of Finance. A nice comparison of the Sharpe, Treynor and Jensen measures is provided here, and more recent concepts of tracking error, information ratio, Sortino ratio, M-squared, Morningstar's ranking system, VaR and style analysis are also discussed. A very nice section on the analysis of timing is provided, covering the models of Treynor-Mazuy 1966, Henrickson and Merton 1981, Henrickson 1984, and Grinblatt and Titman's 1989 decomposition of the Jensen measure. I was surprised to find Roll's 1977 criticism of tests of the CAPM to be presented in this book as a criticism of the CAPM itself. I suspect that Amenc and Le Sourd were lulled by Roll's introductory remarks, which refer to his argument as a "broad indictment of one of the three fundamental paradigms of modern finance"; I would strongly urge that a careful reading of Roll indicates he is defending CAPM by critiquing the tests rather than the model - for example, on pp. 142-3 Roll 1977 examines the 1972 Black, Jensen and Scholes empirical analysis as follows: "Black, Jensen and Scholes rejected the Sharpe-Lintner theory...[however] ...we are entitled to be suspicious of their conclusion. Unless Black, Jensen and Scholes were successful in choosing [the true] market portfolio, their results are fully compatible with the Sharpe-Lintner model."Chapter 5 examines performance measurement, first presenting ARCH, GARCH and ARMA models, and then presents conditional CAPM (including discussions of conditional beta and conditional alpha). Here again we find the Jensen measure, the Treynor and Mazuy model and the Henrickson and Merton model applied to performance measurement. Also valuable here is a nice presentation of non-market model dependent methods of performance analysis, including the Cornell 1979 measure and the Grinblatt and Titman 1989 and 1993 measures.We find the APT model of Ross 1976 and Roll & Ross 1980 in Chapter 6. Fama-MacBeth's 1973 procedure is discussed, as well as the models of Fama and French 1993, Carhart 1997, and the BARRA model that eventually grew out of Rosenberg and McKibben 1973. Factor modeling is discussed, with overviews of maximum likelihood and principal components approaches presented. Next is a useful section on applying factor models to portfolio risk analysis, covering commercially available models from BARRA, Quantal and Advanced Portfolio Technology. I would like to have seen a discussion of the Northfield model as well. Sharpe's 1992 style analysis model is presented, as well as Roll's 1997 approach. An appendix derives the arbitrage valuation relationship.Chapter 7 covers the portfolio construction process utilizing the approaches of Markowitz 1959, Treynor and Black 1973, Black and Litterman 1991 and 1992, Scherer 2002 as well as others. Amenc and Le Sourd is one of the few good descriptions of Fama's 1972 selectivity model, though they fail (as, I believe, have all else) to note the identity relationship of Fama's [Gross] Selectivity measure with Treynor and Black's 1973 Appraisal Premium metric. Perhaps had Amenc and Le Sourd presented their Figure 7.2, illustrating Fama's decomposition, to more closely reflect Fama's Figure 2 this identity would have been apparent to the authors. But Fama illustrated a case in which Net Selectivity is negative, whereas Amenc and Le Sourd illustrate a case in which Net Selectivity is positive, and they do not depict [Gross] Selectivity at all. Brinson's 1986 model is presented along with a nice discussion of the interaction term. Multiperiod and international aspects of performance attribution are covered well, and Engström's 2001 and Grinblatt & Titman's 1989 replicating portfolio techniques are also discussed briefly.The text covers fixed income securities in the final chapter. Yield curve analysis, portfolio construction, and performance analysis for bond portfolios are covered, with introductory discussions of various fixed income models.Amenc and Le Sourd include a bibliography at the end of each chapter, and I found this very useful. A colleague of mine bought the hardcopy, and after reviewing it I decided to purchase the e-book version, which I am enjoying very much. The authors have produced a well-researched and readable exposition that most practitioners would find to be a handy reference, and students would be well served with as a text.
Author(s): Noel Amenc, Veronique Le Sourd
Series: Wiley finance series
Publisher: Wiley
Year: 2003
Language: English
Pages: 283
City: Chichester, England; Hoboken, NJ
Portfolio Theory and Performance Analysis......Page 4
Contents......Page 8
Acknowledgements......Page 14
Biographies......Page 16
Introduction......Page 18
1.1.1 Presentation of the different traditional asset classes......Page 20
1.1.2 Alternative instruments......Page 22
1.2.1 Passive investment management......Page 23
1.3 Organisation of portfolio management and description of the investment management process......Page 25
1.3.2 The multi-style approach......Page 26
1.3.3 Performance analysis......Page 27
1.4.1 Market efficiency......Page 29
1.4.2 Performance persistence......Page 30
1.5 Performance analysis and the AIMR standards......Page 33
1.6 International investment: additional elements to be taken into account......Page 37
Bibliography......Page 39
2.1.1 Return on an asset......Page 42
2.1.2 Portfolio return......Page 44
2.1.3 International investment......Page 50
2.1.4 Handling derivative instruments......Page 55
2.1.5 The AIMR standards for calculating returns......Page 57
2.2.1 Benchmarks......Page 60
2.2.2. Peer groups......Page 66
2.2.3. A new approach: Portfolio Opportunity Distributions......Page 67
2.3 Definition of risk......Page 68
2.3.1 Asset risk......Page 69
2.3.3 Other statistical measures of risk......Page 71
2.3.5 Foreign asset risk......Page 72
2.3.7 Generalisation of the notion of risk: Value-at-Risk......Page 74
2.4.1 Use of time-series......Page 80
2.4.3 Forecast evaluation......Page 81
Appendix 2.1 Calculating the portfolio return with the help of arithmetic and logarithmic asset returns......Page 83
Appendix 2.2 Calculating the continuous geometric rate of return for the portfolio......Page 84
Appendix 2.3 Stock exchange indices......Page 85
Bibliography......Page 91
3.1 Principles......Page 94
3.1.2 Risk aversion......Page 95
3.2 The Markowitz model......Page 97
3.2.1 Formulation of the model......Page 98
3.2.2 Choosing a particular portfolio on the efficient frontier......Page 99
3.2.4 International diversification and currency risk......Page 100
3.3.1 The Markowitz–Sharpe critical line algorithm......Page 101
3.4.1 Sharpe’s single-index model......Page 102
3.4.2 Multi-index models......Page 104
3.4.3 Simplified methods proposed by Elton and Gruber......Page 105
3.5 Conclusion......Page 106
Appendix 3.1 Resolution of the Markowitz problem......Page 107
Bibliography......Page 110
4.1.1 Context in which the model was developed......Page 112
4.1.2 Presentation of the CAPM......Page 115
4.1.3 Modified versions of the CAPM......Page 119
4.1.4 Conclusion......Page 124
4.2.1 The Treynor measure......Page 125
4.2.2 The Sharpe measure......Page 126
4.2.4 Relationships between the different indicators and use of the indicators......Page 127
4.2.5 Extensions to the Jensen measure......Page 129
4.2.7 The information ratio......Page 131
4.2.8 The Sortino ratio......Page 132
4.2.9 Recently developed risk-adjusted return measures......Page 133
4.3 Evaluating the management strategy with the help of models derived from the CAPM: timing analysis......Page 140
4.3.2 The Henriksson and Merton (1981) and Henriksson (1984) models......Page 141
4.3.3 Decomposition of the Jensen measure and evaluation of timing......Page 142
4.4 Measuring the performance of internationally diversified portfolios: extensions to the CAPM......Page 144
4.4.2 McDonald’s model......Page 145
4.5.1 Roll’s criticism......Page 146
Bibliography......Page 147
5.1.1 Presentation of the ARCH models......Page 152
5.1.2 Formulation of the model for several assets......Page 154
5.2.1 The model......Page 157
5.2.2 Application to performance measurement......Page 159
5.2.3 Model with a conditional alpha......Page 161
5.3.1 The Cornell measure......Page 162
5.3.2 The Grinblatt and Titman measure and the positive period weighting measure......Page 163
5.3.3 Performance measure based on the composition of the portfolio: Grinblatt and Titman study......Page 164
Bibliography......Page 165
6.1.1 Arbitrage models......Page 166
6.1.2 Empirical models......Page 168
6.2 Choosing the factors and estimating the model parameters......Page 169
6.2.1 Explicit factor models......Page 170
6.2.2 Implicit or endogenous factor models......Page 176
6.2.3 Comparing the different models......Page 182
6.3.1 The international arbitrage models......Page 183
6.3.2 Factors that explain international returns......Page 186
6.4 Applying multi-factor models......Page 187
6.4.1 Portfolio risk analysis......Page 188
6.4.3 Decomposing the performance of a portfolio......Page 192
6.4.5 Style analysis......Page 196
6.5 Summary and conclusion......Page 206
Appendix 6.1 The principle of arbitrage valuation......Page 207
Bibliography......Page 209
7.1.1 Asset allocation......Page 212
7.2.1 Fama’s decomposition......Page 227
7.2.2 Performance decomposition corresponding to the stages in the investment management process......Page 230
7.2.3 Technique of replicating portfolios for performance measurement......Page 239
Bibliography......Page 240
8.1.1 Yield to maturity and zero-coupon rates......Page 246
8.1.2 Estimating the range of zero-coupon rates from the range of yields to maturity......Page 247
8.1.3 Dynamic interest rate models......Page 249
8.2.1 Quantitative analysis of bond portfolios......Page 251
8.2.2 Defining the risks......Page 252
8.2.3 Factor models for explaining yield curve shifts......Page 253
8.2.4 Optimising a bond portfolio......Page 255
8.2.5 Bond investment strategies......Page 256
8.3 Performance analysis for fixed income security portfolios......Page 257
8.3.2 The Lehman Brothers performance attribution model......Page 258
8.3.3 Additive decomposition of a fixed income portfolio’s performance......Page 260
8.3.4 International Performance Analysis (IPA)......Page 261
8.3.5 Performance decomposition in line with the stages in the investment management process......Page 262
8.3.6 Performance decomposition for multiple currency portfolios......Page 264
8.3.7 The APT model applied to fixed income security portfolios......Page 265
8.3.8 The Khoury, Veilleux and Viau model......Page 266
8.3.9 The Barra model for fixed income security portfolios......Page 267
Bibliography......Page 268
Conclusion......Page 270
Index......Page 272
