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Portfolio Management in Practice, Volume 2 : Asset Allocation.

By: Institute, CFA.
Series: Publisher: Newark : John Wiley & Sons, Incorporated, ©2021Copyright date: ©2021Description: 629 p.Content type: text Media type: unmediated Carrier type: volumeISBN: 9781119787969.Genre/Form: Print books.
Contents:
Cover -- Portfolio Management In Practice Volume 2 -- Title Page -- Copyright -- Contents -- Preface -- Acknowledgments -- About the CFA Institute Investment Series -- Chapter 1: Basics of Portfolio Planning and Construction -- 1. Introduction -- 2. Portfolio Planning -- 2.1. The Investment Policy Statement -- 2.2. Major Components of an IPS -- 2.3. Gathering Client Information -- 3. Portfolio Construction -- 3.1. Capital Market Expectations -- 3.2. The Strategic Asset Allocation -- 3.3. Steps Toward an Actual Portfolio -- 3.4. ESG Considerations in Portfolio Planning and Construction -- 3.5. Alternative Portfolio Organizing Principles -- 4. Conclusion and Summary -- References -- Practice Problems -- Chapter 2: Security Market Indexes -- 1. Introduction -- 2. Index Definition and Calculations of Value and Returns -- 2.1. Calculation of Single-Period Returns -- 2.2. Calculation of Index Values over Multiple Time Periods -- 3. Index Construction and Management -- 3.1. Target Market and Security Selection -- 3.2. Index Weighting -- 3.3. Index Management: Rebalancing and Reconstitution -- 4. Uses of Market Indexes -- 4.1. Gauges of Market Sentiment -- 4.2. Proxies for Measuring and Modeling Returns, Systematic Risk, and Risk-Adjusted Performance -- 4.3. Proxies for Asset Classes in Asset Allocation Models -- 4.4. Benchmarks for Actively Managed Portfolios -- 4.5. Model Portfolios for Investment Products -- 5. Equity Indexes -- 5.1. Broad Market Indexes -- 5.2. Multi-Market Indexes -- 5.3. Sector Indexes -- 5.4. Style Indexes -- 6. Fixed-Income Indexes -- 6.1. Construction -- 6.2. Types of Fixed-Income Indexes -- 7. Indexes for Alternative Investments -- 7.1. Commodity Indexes -- 7.2. Real Estate Investment Trust Indexes -- 7.3. Hedge Fund Indexes -- 8. Summary -- Practice Problems.
Chapter 3:Capital Market Expectations, Part 1: Framework and Macro Considerations -- 1. Introduction -- 2. Framework and Challenges -- 2.1. A Framework for Developing Capital Market Expectations -- 2.2. Challenges in Forecasting -- 3. Economic and Market Analysis -- 3.1. The Role of Economic Analysis -- 3.2. Analysis of Economic Growth -- 3.3. Approaches to Economic Forecasting -- 3.4. Business Cycle Analysis -- 3.5. Analysis of Monetary and Fiscal Policy -- 3.6. International Interactions -- 4. Summary -- References -- Practice Problems -- Chapter 4: Capital Market Expectations, Part 2: Forecasting Asset Class Returns -- 1. Introduction -- 2. Overview of Tools and Approaches -- 2.1. The Nature of the Problem -- 2.2. Approaches to Forecasting -- 3. Forecasting Fixed-Income Returns -- 3.1. Applying DCF to Fixed Income -- 3.2. The Building Block Approach to Fixed-Income Returns -- 3.3. Risks in Emerging Market Bonds -- 4. Forecasting Equity Returns -- 4.1. Historical Statistics Approach to Equity Returns -- 4.2. DCF Approach to Equity Returns -- 4.3. Risk Premium Approaches to Equity Returns -- 4.4. Risks in Emerging Market Equities -- 5. Forecasting Real Estate Returns -- 5.1. Historical Real Estate Returns -- 5.2. Real Estate Cycles -- 5.3. Capitalization Rates -- 5.4. The Risk Premium Perspective on Real Estate Expected Return -- 5.5. Real Estate in Equilibrium -- 5.6. Public vs. Private Real Estate -- 5.7. Long-Term Housing Returns -- 6. Forecasting Exchange Rates -- 6.1. Focus on Goods and Services, Trade, and the Current Account -- 6.2. Focus on Capital Flows -- 7. Forecasting Volatility -- 7.1. Estimating a Constant VCV Matrix with Sample Statistics -- 7.2. VCV Matrices from Multi-Factor Models -- 7.3. Shrinkage Estimation of VCV Matrices -- 7.4. Estimating Volatility from Smoothed Returns -- 7.5. Time-Varying Volatility: ARCH Models.
8. Adjusting a Global Portfolio -- 8.1. Macro-Based Recommendations -- 8.2. Quantifying the Views -- 9. Summary -- References -- Practice Problems -- Chapter 5: Overview of Asset Allocation -- 1. Introduction -- 2. Asset Allocation: Importance in Investment Management -- 3. The Investment Governance Background to Asset Allocation -- 3.1. Governance Structures -- 3.2. Articulating Investment Objectives -- 3.3. Allocation of Rights and Responsibilities -- 3.4. Investment Policy Statement -- 3.5. Asset Allocation and Rebalancing Policy -- 3.6. Reporting Framework -- 3.7. The Governance Audit -- 4. The Economic Balance Sheet and Asset Allocation -- 5. Approaches to Asset Allocation -- 5.1. Relevant Objectives -- 5.2. Relevant Risk Concepts -- 5.3. Modeling Asset Class Risk -- 6. Strategic Asset Allocation -- 6.1. Asset Only -- 6.2. Liability Relative -- 6.3. Goals Based -- 7. Implementation Choices -- 7.1. Passive/Active Management of Asset Class Weights -- 7.2. Passive/Active Management of Allocations to Asset Classes -- 7.3. Risk Budgeting Perspectives in Asset Allocation and Implementation -- 8. Rebalancing: Strategic Considerations -- 8.1. A Framework for Rebalancing -- 8.2. Strategic Considerations in Rebalancing -- 9. Summary -- References -- Practice Problems -- Chapter 6: Principles of Asset Allocation -- 1. Introduction -- 2. Developing Asset-Only Asset Allocations -- 2.1. Mean-Variance Optimization: Overview -- 2.2. Monte Carlo Simulation -- 2.3. Criticisms of Mean-Variance Optimization -- 2.4. Addressing the Criticisms of Mean-Variance Optimization -- 2.5. Allocating to Less Liquid Asset Classes -- 2.6. Risk Budgeting -- 2.7. Factor-Based Asset Allocation -- 3. Developing Liability-Relative Asset Allocations -- 3.1. Characterizing the Liabilities -- 3.2. Approaches to Liability-Relative Asset Allocation.
3.3. Examining the Robustness of Asset Allocation Alternatives -- 3.4. Factor Modeling in Liability-Relative Approaches -- 4. Developing Goals-Based Asset Allocations -- 4.1. The Goals-Based Asset Allocation Process -- 4.2. Describing Client Goals -- 4.3. Constructing Sub-Portfolios -- 4.4. The Overall Portfolio -- 4.5. Revisiting the Module Process in Detail -- 4.6. Periodically Revisiting the Overall Asset Allocation -- 4.7. Issues Related to Goals-Based Asset Allocation -- 5. Heuristics and Other Approaches to Asset Allocation -- 5.1. The "120 minus your age" rule -- 5.2. The 60/40 stock/bond heuristic -- 5.3. The endowment model -- 5.4. Risk parity -- 5.5. The 1/N rule -- 6. Portfolio Rebalancing in Practice -- 7. Conclusions -- References -- Practice Problems -- Chapter 7: Asset Allocation with Real-World Constraints -- 1. Introduction -- 2. Constraints in Asset Allocation -- 2.1. Asset Size -- 2.2. Liquidity -- 2.3. Time Horizon -- 2.4. Regulatory and Other External Constraints -- 3. Asset Allocation for the Taxable Investor -- 3.1. After-Tax Portfolio Optimization -- 3.2. Taxes and Portfolio Rebalancing -- 3.3. Strategies to Reduce Tax Impact -- 4. Revising the Strategic Asset Allocation -- 5. Short-Term Shifts in Asset Allocation -- 5.1. Discretionary TAA -- 5.2. Systematic TAA -- 6. Dealing with Behavioral Biases in Asset Allocation -- 6.1. Loss Aversion -- 6.2. Illusion of Control -- 6.3. Mental Accounting -- 6.4. Representativeness Bias -- 6.5. Framing Bias -- 6.6. Availability Bias -- 7. Summary -- References -- Practice Problems -- Chapter 8: Asset Allocation to Alternative Investments -- 1. Introduction -- 2. The Role of Alternative Investments in a Multi-Asset Portfolio -- 2.1. The Role of Private Equity in a Multi-Asset Portfolio -- 2.2. The Role of Hedge Funds in a Multi-Asset Portfolio.
2.3. The Role of Real Assets in a Multi-Asset Portfolio -- 2.4. The Role of Commercial Real Estate in a Multi-Asset Portfolio -- 2.5. The Role of Private Credit in a Multi-Asset Portfolio -- 3. Diversifying Equity Risk -- 3.1. Volatility Reduction over the Short Time Horizon -- 3.2. Risk of Not Meeting the Investment Goals over the Long Time Horizon -- 4. Perspectives on the Investment Opportunity Set -- 4.1. Traditional Approaches to Asset Classification -- 4.2. Risk-Based Approaches to Asset Classification -- 4.3. Comparing Risk-Based and Traditional Approaches -- 5. Investment Considerations Relevant to the Decision to Invest in Alternatives -- 5.1. Risk Considerations -- 5.2. Return Expectations -- 5.3. Investment Vehicle -- 5.4. Liquidity -- 5.5. Fees and Expenses -- 5.6. Tax Considerations -- 5.7. Other Considerations -- 6. Suitability Considerations -- 6.1. Investment Horizon -- 6.2. Expertise -- 6.3. Governance -- 6.4. Transparency -- 7. Asset Allocation Approaches -- 7.1. Statistical Properties and Challenges of Asset Returns -- 7.2. Monte Carlo Simulation -- 7.3. Portfolio Optimization -- 7.4. Risk Factor-Based Optimization -- 8. Liquidity Planning -- 8.1. Achieving and Maintaining the Strategic Asset Allocation -- 8.2. Managing the Capital Calls -- 8.3. Preparing for the Unexpected -- 9. Monitoring the Investment Program -- 9.1. Overall Investment Program Monitoring -- 9.2. Performance Evaluation -- 9.3. Monitoring the Firm and the Investment Process -- 10. Summary -- References -- Practice Problems -- Chapter 9: Exchange-Traded Funds: Mechanics and Applications -- 1. Introduction -- 2. ETF Mechanics -- 2.1. The Creation/Redemption Process -- 2.2. Trading and Settlement -- 3. Understanding ETFs -- 3.1. Expense Ratios -- 3.2. Index Tracking/Tracking Error -- 3.3. Tax Issues -- 3.4. ETF Trading Costs -- 3.5. Total Costs of ETF Ownership.
3.6. Risks.
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Cover -- Portfolio Management In Practice Volume 2 -- Title Page -- Copyright -- Contents -- Preface -- Acknowledgments -- About the CFA Institute Investment Series -- Chapter 1: Basics of Portfolio Planning and Construction -- 1. Introduction -- 2. Portfolio Planning -- 2.1. The Investment Policy Statement -- 2.2. Major Components of an IPS -- 2.3. Gathering Client Information -- 3. Portfolio Construction -- 3.1. Capital Market Expectations -- 3.2. The Strategic Asset Allocation -- 3.3. Steps Toward an Actual Portfolio -- 3.4. ESG Considerations in Portfolio Planning and Construction -- 3.5. Alternative Portfolio Organizing Principles -- 4. Conclusion and Summary -- References -- Practice Problems -- Chapter 2: Security Market Indexes -- 1. Introduction -- 2. Index Definition and Calculations of Value and Returns -- 2.1. Calculation of Single-Period Returns -- 2.2. Calculation of Index Values over Multiple Time Periods -- 3. Index Construction and Management -- 3.1. Target Market and Security Selection -- 3.2. Index Weighting -- 3.3. Index Management: Rebalancing and Reconstitution -- 4. Uses of Market Indexes -- 4.1. Gauges of Market Sentiment -- 4.2. Proxies for Measuring and Modeling Returns, Systematic Risk, and Risk-Adjusted Performance -- 4.3. Proxies for Asset Classes in Asset Allocation Models -- 4.4. Benchmarks for Actively Managed Portfolios -- 4.5. Model Portfolios for Investment Products -- 5. Equity Indexes -- 5.1. Broad Market Indexes -- 5.2. Multi-Market Indexes -- 5.3. Sector Indexes -- 5.4. Style Indexes -- 6. Fixed-Income Indexes -- 6.1. Construction -- 6.2. Types of Fixed-Income Indexes -- 7. Indexes for Alternative Investments -- 7.1. Commodity Indexes -- 7.2. Real Estate Investment Trust Indexes -- 7.3. Hedge Fund Indexes -- 8. Summary -- Practice Problems.

Chapter 3:Capital Market Expectations, Part 1: Framework and Macro Considerations -- 1. Introduction -- 2. Framework and Challenges -- 2.1. A Framework for Developing Capital Market Expectations -- 2.2. Challenges in Forecasting -- 3. Economic and Market Analysis -- 3.1. The Role of Economic Analysis -- 3.2. Analysis of Economic Growth -- 3.3. Approaches to Economic Forecasting -- 3.4. Business Cycle Analysis -- 3.5. Analysis of Monetary and Fiscal Policy -- 3.6. International Interactions -- 4. Summary -- References -- Practice Problems -- Chapter 4: Capital Market Expectations, Part 2: Forecasting Asset Class Returns -- 1. Introduction -- 2. Overview of Tools and Approaches -- 2.1. The Nature of the Problem -- 2.2. Approaches to Forecasting -- 3. Forecasting Fixed-Income Returns -- 3.1. Applying DCF to Fixed Income -- 3.2. The Building Block Approach to Fixed-Income Returns -- 3.3. Risks in Emerging Market Bonds -- 4. Forecasting Equity Returns -- 4.1. Historical Statistics Approach to Equity Returns -- 4.2. DCF Approach to Equity Returns -- 4.3. Risk Premium Approaches to Equity Returns -- 4.4. Risks in Emerging Market Equities -- 5. Forecasting Real Estate Returns -- 5.1. Historical Real Estate Returns -- 5.2. Real Estate Cycles -- 5.3. Capitalization Rates -- 5.4. The Risk Premium Perspective on Real Estate Expected Return -- 5.5. Real Estate in Equilibrium -- 5.6. Public vs. Private Real Estate -- 5.7. Long-Term Housing Returns -- 6. Forecasting Exchange Rates -- 6.1. Focus on Goods and Services, Trade, and the Current Account -- 6.2. Focus on Capital Flows -- 7. Forecasting Volatility -- 7.1. Estimating a Constant VCV Matrix with Sample Statistics -- 7.2. VCV Matrices from Multi-Factor Models -- 7.3. Shrinkage Estimation of VCV Matrices -- 7.4. Estimating Volatility from Smoothed Returns -- 7.5. Time-Varying Volatility: ARCH Models.

8. Adjusting a Global Portfolio -- 8.1. Macro-Based Recommendations -- 8.2. Quantifying the Views -- 9. Summary -- References -- Practice Problems -- Chapter 5: Overview of Asset Allocation -- 1. Introduction -- 2. Asset Allocation: Importance in Investment Management -- 3. The Investment Governance Background to Asset Allocation -- 3.1. Governance Structures -- 3.2. Articulating Investment Objectives -- 3.3. Allocation of Rights and Responsibilities -- 3.4. Investment Policy Statement -- 3.5. Asset Allocation and Rebalancing Policy -- 3.6. Reporting Framework -- 3.7. The Governance Audit -- 4. The Economic Balance Sheet and Asset Allocation -- 5. Approaches to Asset Allocation -- 5.1. Relevant Objectives -- 5.2. Relevant Risk Concepts -- 5.3. Modeling Asset Class Risk -- 6. Strategic Asset Allocation -- 6.1. Asset Only -- 6.2. Liability Relative -- 6.3. Goals Based -- 7. Implementation Choices -- 7.1. Passive/Active Management of Asset Class Weights -- 7.2. Passive/Active Management of Allocations to Asset Classes -- 7.3. Risk Budgeting Perspectives in Asset Allocation and Implementation -- 8. Rebalancing: Strategic Considerations -- 8.1. A Framework for Rebalancing -- 8.2. Strategic Considerations in Rebalancing -- 9. Summary -- References -- Practice Problems -- Chapter 6: Principles of Asset Allocation -- 1. Introduction -- 2. Developing Asset-Only Asset Allocations -- 2.1. Mean-Variance Optimization: Overview -- 2.2. Monte Carlo Simulation -- 2.3. Criticisms of Mean-Variance Optimization -- 2.4. Addressing the Criticisms of Mean-Variance Optimization -- 2.5. Allocating to Less Liquid Asset Classes -- 2.6. Risk Budgeting -- 2.7. Factor-Based Asset Allocation -- 3. Developing Liability-Relative Asset Allocations -- 3.1. Characterizing the Liabilities -- 3.2. Approaches to Liability-Relative Asset Allocation.

3.3. Examining the Robustness of Asset Allocation Alternatives -- 3.4. Factor Modeling in Liability-Relative Approaches -- 4. Developing Goals-Based Asset Allocations -- 4.1. The Goals-Based Asset Allocation Process -- 4.2. Describing Client Goals -- 4.3. Constructing Sub-Portfolios -- 4.4. The Overall Portfolio -- 4.5. Revisiting the Module Process in Detail -- 4.6. Periodically Revisiting the Overall Asset Allocation -- 4.7. Issues Related to Goals-Based Asset Allocation -- 5. Heuristics and Other Approaches to Asset Allocation -- 5.1. The "120 minus your age" rule -- 5.2. The 60/40 stock/bond heuristic -- 5.3. The endowment model -- 5.4. Risk parity -- 5.5. The 1/N rule -- 6. Portfolio Rebalancing in Practice -- 7. Conclusions -- References -- Practice Problems -- Chapter 7: Asset Allocation with Real-World Constraints -- 1. Introduction -- 2. Constraints in Asset Allocation -- 2.1. Asset Size -- 2.2. Liquidity -- 2.3. Time Horizon -- 2.4. Regulatory and Other External Constraints -- 3. Asset Allocation for the Taxable Investor -- 3.1. After-Tax Portfolio Optimization -- 3.2. Taxes and Portfolio Rebalancing -- 3.3. Strategies to Reduce Tax Impact -- 4. Revising the Strategic Asset Allocation -- 5. Short-Term Shifts in Asset Allocation -- 5.1. Discretionary TAA -- 5.2. Systematic TAA -- 6. Dealing with Behavioral Biases in Asset Allocation -- 6.1. Loss Aversion -- 6.2. Illusion of Control -- 6.3. Mental Accounting -- 6.4. Representativeness Bias -- 6.5. Framing Bias -- 6.6. Availability Bias -- 7. Summary -- References -- Practice Problems -- Chapter 8: Asset Allocation to Alternative Investments -- 1. Introduction -- 2. The Role of Alternative Investments in a Multi-Asset Portfolio -- 2.1. The Role of Private Equity in a Multi-Asset Portfolio -- 2.2. The Role of Hedge Funds in a Multi-Asset Portfolio.

2.3. The Role of Real Assets in a Multi-Asset Portfolio -- 2.4. The Role of Commercial Real Estate in a Multi-Asset Portfolio -- 2.5. The Role of Private Credit in a Multi-Asset Portfolio -- 3. Diversifying Equity Risk -- 3.1. Volatility Reduction over the Short Time Horizon -- 3.2. Risk of Not Meeting the Investment Goals over the Long Time Horizon -- 4. Perspectives on the Investment Opportunity Set -- 4.1. Traditional Approaches to Asset Classification -- 4.2. Risk-Based Approaches to Asset Classification -- 4.3. Comparing Risk-Based and Traditional Approaches -- 5. Investment Considerations Relevant to the Decision to Invest in Alternatives -- 5.1. Risk Considerations -- 5.2. Return Expectations -- 5.3. Investment Vehicle -- 5.4. Liquidity -- 5.5. Fees and Expenses -- 5.6. Tax Considerations -- 5.7. Other Considerations -- 6. Suitability Considerations -- 6.1. Investment Horizon -- 6.2. Expertise -- 6.3. Governance -- 6.4. Transparency -- 7. Asset Allocation Approaches -- 7.1. Statistical Properties and Challenges of Asset Returns -- 7.2. Monte Carlo Simulation -- 7.3. Portfolio Optimization -- 7.4. Risk Factor-Based Optimization -- 8. Liquidity Planning -- 8.1. Achieving and Maintaining the Strategic Asset Allocation -- 8.2. Managing the Capital Calls -- 8.3. Preparing for the Unexpected -- 9. Monitoring the Investment Program -- 9.1. Overall Investment Program Monitoring -- 9.2. Performance Evaluation -- 9.3. Monitoring the Firm and the Investment Process -- 10. Summary -- References -- Practice Problems -- Chapter 9: Exchange-Traded Funds: Mechanics and Applications -- 1. Introduction -- 2. ETF Mechanics -- 2.1. The Creation/Redemption Process -- 2.2. Trading and Settlement -- 3. Understanding ETFs -- 3.1. Expense Ratios -- 3.2. Index Tracking/Tracking Error -- 3.3. Tax Issues -- 3.4. ETF Trading Costs -- 3.5. Total Costs of ETF Ownership.

3.6. Risks.

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