Frontiers of Modern Asset Allocation

Innovative approaches to putting asset allocation into practice Building on more than 15 years of asset-allocation research, Paul D. Kaplan, who led the development of the methodologies behind the Morningstar Rating(TM) and the Morningstar Style Box(TM), tackles key challenges investor professionals face when putting asset-allocation theory into practice. This book addresses common issues such as: How should asset classes be defined? Should equities be divided into asset classes based on investment style, geography, or other factors? Should asset classes be represented by market-cap-weighted indexes or should other principles, such as fundamental weights, be used? How do actively managed funds fit into asset-class mixes? Kaplan also interviews industry luminaries who have greatly influenced the evolution of asset allocation, including Harry Markowitz, Roger Ibbotson, and the late Benoit Mandelbrot. Throughout the book, Kaplan explains allocation theory, creates new strategies, and corrects common misconceptions, offering original insights and analysis. He includes three appendices that put theory into action with technical details for new asset-allocation frameworks, including the next generation of portfolio construction tools, which Kaplan dubs "e;Markowitz 2.0."e;

Innovative approaches to putting asset allocation intopracticeBuilding on more than 15 years of asset-allocation researchPaul D. Kaplan, who led the development of the methodologies behindthe Morningstar Rating(TM) and the Morningstar Style Box(TM)tackles key challenges investor professionals face when puttingasset-allocation theory into practice. This book addresses commonissues such as:* How should asset classes be defined?* Should equities be divided into asset classes based oninvestment style, geography, or other factors?* Should asset classes be represented by market-cap-weightedindexes or should other principles, such as fundamental weights, beused?* How do actively managed funds fit into asset-class mixes?Kaplan also interviews industry luminaries who have greatlyinfluenced the evolution of asset allocation, including HarryMarkowitz, Roger Ibbotson, and the late Benoit Mandelbrot.Throughout the book, Kaplan explains allocation theory, creates newstrategies, and corrects common misconceptions, offering originalinsights and analysis. He includes three appendices that put theoryinto action with technical details for new asset-allocationframeworks, including the next generation of portfolio constructiontools, which Kaplan dubs "Markowitz 2.0."

Foreword xiIntroduction xxiiiA Note on Expected Return and Geometric Mean xxvAcknowledgments xxxiPART ONE EquitiesCHAPTER 1 Purity of Purpose: How Style-Pure Indexes ProvideUseful Insights 7CHAPTER 2 Investing in Europe with Style: Why Investors inEurope Would Benefit From Constructing Portfolios Through the Prismof Style 15CHAPTER 3 Why Fundamental Indexation Might--or MightNot--Work 21CHAPTER 4 The Fundamental Debate: Two Experts Square Off on theBig Issues Surrounding Fundamentally Weighted Indexes 39CHAPTER 5 Collared Weighting: A Hybrid Approach to Indexing51CHAPTER 6 Yield to Investors? A Practical Approach to BuildingDividend Indexes 63CHAPTER 7 Holdings-Based and Returns-Based Style Models 71CHAPTER 8 Estimates of Small Stock Betas Are Much Too Low103CHAPTER 9 A Macroeconomic Model of the Equity Risk Premium117PART TWO Fixed Income, Real Estate, andAlternativesCHAPTER 10 Good and Bad Monetary Economics, and Why InvestorsNeed to Know the Difference 133CHAPTER 11 Inflation, Gilt Yields, and Economic Policy 143CHAPTER 12 Reverse Mean-Variance Optimization for Real EstateAsset-Allocation Parameters 147CHAPTER 13 The Long and Short of Commodity Indexes 157CHAPTER 14 Less Alpha and More Beta Than Meets the Eye 175CHAPTER 15 Venture Capital and its Role in Strategic AssetAllocation 179PART THREE Crashes and Fat TailsCHAPTER 16 One-and-a-Quarter Centuries of Stock Market Drawdowns193CHAPTER 17 Stock Market Bubbles and Crashes: A Global Historicaland Economic Perspective 199CHAPTER 18 De´ ja` Vu All Over Again 211CHAPTER 19 De´ ja` Vu Around the World 223CHAPTER 20 Getting a Read on Risk: A Discussion with RogerIbbotson, George Cooper, and Beno^it Mandelbrot on theCrisis and Risk Models 239PART FOUR Doing Asset AllocationCHAPTER 21 Does Asset-Allocation Policy Explain 40 Percent, 90Percent, or 100 Percent of Performance? 253CHAPTER 22 Asset-Allocation Models Using the Markowitz Approach267CHAPTER 23 Asset Allocation with Annuities for Retirement IncomeManagement 275CHAPTER 24 MPT Put Through the Wringer: A Debate Between StevenFox and Michael Falk 303CHAPTER 25 Updating Monte Carlo Simulation for the Twenty-FirstCentury 311CHAPTER 26 Markowitz 2.0 325CHAPTER 27 What Does Harry Markowitz Think? A Discussion withHarry Markowitz and Sam Savage 351Afterword 367About the Author 375Index 377