Portfolio Design : A Modern Approach to Asset Allocation

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2011-03-29
  • Publisher: Wiley
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Supplemental Materials

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This book is based on the sessions that Martson has developed for the CIMA program as well as for Morgan Stanley's Senior Consultants Program begun at Wharton in the mid-1980s even before the CIMA program began. The book is designed for top investment advisors who want to provide diversified portfolios for their clients, whether they are high net worth private clients or institutional investors. The book examines all of the major asset classes that go into modern portfolios and asks how much they add to portfolio diversification.

Author Biography

RICHARD C. MARSTON is currently James R.F. Guy Professor of Finance and Director, George Weiss Center for International Financial Research at the Wharton School, University of Pennsylvania. He was a recipient of the Rhodes Scholarship, Fulbright Fellowship, and the Sanwa Bank Prize in International Finance. He has been a research associate for the National Bureau of Economic Research since 1979, a visiting professor at London Business School, ESSEC in Paris, and the Sasin Institute at Chulalongkorn University in Bangkok, and Visiting Scholar at the Bank of Japan. Since 1999, he has been Academic Director of the Private Wealth Management Program at Wharton, a week-long program for ultra-high-net-worth investors, and he is a long-standing faculty member in the Certified Investment Management Analyst program at Wharton, having taught asset allocation to over 5000 financial advisors.

Table of Contents

Prefacep. xiii
Acknowledgmentsp. xv
About the Authorp. xvii
About the Bookp. xix
Disclaimersp. xxi
Asset Allocationp. 1
Ingredients of Asset Allocationp. 3
Lessons of the Recent Downturnp. 6
So Are Bonds the Place to Invest?p. 10
So What Happens When the Economy Turns Up?p. 13
Some Necessary Tools for Analysisp. 15
Appendix: Description of the Statistical Toolsp. 16
Long-Run Returns on Stocks and Bondsp. 21
Stocks and Bonds Since 1951p. 22
How Much More Attractive Are Stocks than Bonep. 24
Real Returnsp. 25
Reconsidering Bond Returnsp. 27
Reconsidering Stock Returnsp. 30
Alternative Estimates of Long-Run Stock Returnsp. 32
Upper and Lower Bounds for Equity Returnsp. 35
Appendix: Alternative Estimates of Stock Returnsp. 36
Small-Cap Stocksp. 41
What Do We Mean by Small-Cap Stocks?p. 43
Relative Performance of Large-Cap and Small-Cap Stocks-Russell Seriesp. 45
Relative Performance of Large-Cap and Small-Cap Stocks-SBBI Seriesp. 48
Relative Performance of Large-Cap and Small-Cap Stocks-Broader Analysisp. 50
Large-Cap and Small-Cap Stocks in a Portfolio Contextp. 52
Summary-Key Features of Small-Cap Stocksp. 55
Value and Growth Investingp. 57
Description of the Russell 1000 Indexesp. 57
Relative Performance of Growth and Value Indexesp. 59
Value and Growth Indexes for Earlier Periodsp. 64
Relative Performance of Small-Cap Growth and Value Stocksp. 65
Portfolios with Growth and Valuep. 69
Summary-Key Features of Growth and Value Stocksp. 71
Foreign Stocksp. 73
Returns on Foreign and U.S. Stocksp. 75
Currency Capital Gains and Foreign Stock Returnsp. 79
Diversification Benefits of Foreign Stock Investingp. 85
Are There Shortcuts to Owning Foreign Stocks?p. 90
Summary-Key Features of Foreign Stocksp. 93
Emerging Marketsp. 97
What Is An Emerging Market?p. 98
Emerging Stock Market Indexesp. 101
Emerging Stock Market Returnsp. 103
Risks of Investing in Emerging Stock Marketsp. 107
Emerging Market Bonds-A Brief Historyp. 113
Returns on Emerging Market Bondsp. 114
Summary-Key Features of Emerging Market Stocks and Bondsp. 117
Bondsp. 121
Treasury Bondsp. 122
The Wider U.S. Bond Marketp. 127
Returns on U.S. Bondsp. 131
Bond Markets Outside the United Statesp. 133
Summary-Key Features of Bondsp. 140
Strategic Asset Allocationp. 143
Expanding the Portfolio to Include Other Bonds and Stocksp. 145
Expanding the Portfolio to Include Foreign Stocksp. 147
The Dirty Secret of Optimizationp. 150
Alternative Approaches to Optimizationp. 154
Estimating Portfolio Returns-the Premium Methodp. 155
Portfolios in Practice-Example of MarketWatch.com' Lazy Portfoliosp. 159
Beyond the Traditional Efficient Frontierp. 163
Hedge Fundsp. 167
Investment Strategiesp. 169
Hedge Fund Returnsp. 172
Hedge Fund Biasesp. 178
Performance Across Managersp. 181
Fund of Fundsp. 182
Hedge Funds in a Portfoliop. 186
Summary-Key Features of Hedge Fundsp. 187
Venture Capital and Private Equityp. 191
Common Features of Venture Capital and Buyout Fundsp. 192
Venture Capitalp. 195
Returns on Venture Capitalp. 198
Buyout Fundsp. 205
Returns on Buyout Fundsp. 207
Key Features of Private Equityp. 211
Real Assets-Real Estatep. 213
Real Estate Investment Trustsp. 214
Direct Ownership of Real Estatep. 220
Home Ownershipp. 223
Concluding Remarksp. 231
Real Assets-Commoditiesp. 235
Sources of Return on Commodity Futuresp. 236
Returns on Commodity Futuresp. 239
Performance in a Portfoliop. 245
Does Gold Belong in the Portfolio?p. 249
Active Investment in Commodities-Managed Futuresp. 251
Summary-Key Features of Commodity Investmentsp. 253
Asset Allocation with Alternative Investmentsp. 257
Diversifying into Real Estate-Alternatives for Ordinary Investorsp. 258
Expanding the Menu of Alternative Assetsp. 262
High Net Worth (HNW) Portfoliosp. 264
Ultra HNW Portfoliosp. 266
Lessons about Alternatives from the Yale Endowmentp. 269
Lessons about Alternative Investments Learned in the Financial Crisisp. 277
Verdict on Alternative Investmentsp. 280
Investing and Spending by Foundationsp. 285
Spending Rulesp. 286
Estimating Future Bond and Stock Returnsp. 288
Volatility and Uncertaintyp. 288
Portfolios of Stocks and Bondsp. 290
Description of the Spending Planp. 291
Using Historical Returns Since 1951 to Set Spending Rulesp. 292
Effect of Lower Stock Returns on Spending Rulesp. 294
Effects of Different Stock/Bond Allocationsp. 296
Concluding Commentsp. 299
Investing and Spending in Retirementp. 303
Longevityp. 306
Spending Rules for Retirementp. 308
Portfolios of Stocks and Bondsp. 309
Baseline Case: Can Two Live More Cheaply Than One?p. 310
Effects of Bequests and Variable Spending Rulesp. 311
How Can I Turn a Defined Contribution Plan into Defined Benefit Plan?p. 313
Concluding Comments-Postpone Retirement?p. 314
The Discipline of Asset Allocation-Rebalancingp. 319
Rebalancing Definedp. 320
Rebalancing When Times Are Goodp. 321
Rebalancing When Times Are Badp. 323
Referencesp. 325
Indexp. 33
Table of Contents provided by Ingram. All Rights Reserved.

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