What do you say
about a book that quotes Pope John Paul II in the context of
portfolio management? After acknowledging that the vast majority of active
managers underperform their benchmarks, the authors not only explain how to
achieve positive alpha, but then describe how to achieve "alpha mojo." We should
all be salivating while they announce
"Alpha mojo ... produces outsize returns
that defy the presumption of some universal, inconvertible ratio between risk
and reward."
I don't have to
tell you this is a
pretensions book.
Modeled after the popular book by Grinold and Kahn (1999),
it serves up a mix of math, finance theory, investment management
practice and raw enthusiasm. The book is, fundamentally, a book about how to
manage equity portfolios using factor models. It is too long for the topic, but
if you boiled it down to 100 pages or so, it would actually be an excellent
book. I think it would benefit from a more formal treatment of the relevant
math, but quantitative professionals will be able to figure out what is going
on.
Contents
1. The power of QEPM
2. The fundamentals of QEPM
3. Basic
QEPM models
4. Factors and factor
choice
5. Stock screening and ranking
6. Fundamental factor models
7.
Economic factor models
8. Forecasting
factor premiums and exposures
9.
Portfolio weights
10. Rebalancing and
transactions costs
11. Tax management
12. Leverage
A useful aspect of the book is the fact that it
explores various types of fundamental, economic and other factors that could be
incorporated into a model. But more detail would have been helpful,
including formulas or sources for specific factor data.
The book is also useful for some related topics
it touches on. There are chapters on Bayesian methods, transaction costs,
tax effects and backtesting. These are hardly comprehensive, but they will
get readers thinking.
If you found Grinold and Khan useful, this is
more of the same. Despite its shortcomings, I recommend it. [December 11,
2006]
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