Active Asset Allocation: Gaining Advantage in a Highly Efficient Stock Market
How much of a portfolio should be invested in the stock market? This is a pressing issue whether you're an institutional investor - managing pension, endowment, or foundation funds - or an enterprising individual investor. Active Asset Allocation addresses this most critical of investment issues, arguing for active management of asset allocation within the framework of a long-term passive plan. Central to this strategy is an innovative approach to stock market valuation drawn from the authors' work with large institutional investors. For most investors, active management and passive investing are mutually exclusive disciplines. The active decision process presented here breaks with this traditional view. Using the market price as a storehouse of information, it identifies three measures relating to the business outlook, interest rates, and investor confidence that gauge likely changes in stock. In addition to presenting a detailed blueprint for the decision model, the book also explains how to establish active asset allocation in the framework of a long-term passive plan; exploit hidden information embedded in the financial markets; focus on the only opportunity open to the active manager - the thin margin of "slow" information; gauge the implications of earnings forecasts for stock market performance; identify three prime variables critical to the decision process; control investment-manager bias - a frequent contributor to mistakes in active asset allocation; and guard against the dangers of "backdoor market timing" - a particular hazard for investors who are most committed to passive management.
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Redefining the Decision Process
Looking for the Message in MarketPrice Change
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active asset allocation ahead analysis asset groups assumptions average back-door market basis points bond yields Chap consensus estimates correlation current market price decision maker Declining Midrange Undervalued dividend growth dividend payments dividend yield dividend-growth rate drive stock prices efficient market hypothesis efficient stock market excess return expected return four quarters future futures contracts Harvard Management Company highly efficient market highly efficient stock hindsight bias index funds inflation interest rates investor confidence low Undervalued market-price change measure Neutral Midrange Neutral Panel passive investing passive management percent performance period policy plan Price change price-earnings ratio provides reflect Rising Midrange Neutral Rising Midrange Overvalued risk premium risk-free rate slow information Standard & Poor's stock market valuation strong Neutral Midrange strong Rising Midrange Table three key factors three prime variables tion traditional active management Treasury bill yields Weak Declining Midrange Weak Rising Midrange