Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation

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Richard O. Michaud
Harvard Business School Press, 1998 - Business & Economics - 152 pages
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The failure of optimized portfolios to meet their practical investment goals has prompted many portfolio managers to abandon optimization techniques for simpler alternatives to maximize asset value. Yet, according to financial expert Richard Michaud, readily available methods exist to help practitioners reduce instability and enhance the value of optimization--tools that the investment community has largely ignored. In his succinct new book, Michaud argues that the problems lies with the conventional perception of optimization as a numerical computation; this view has severely restricted the typical manager's understanding of inherent limitations--and resulted in optimized portfolios that frequently fall short of their potential. If, instead, managers approach optimization as a statistical estimation, Michaud argues, they can resolve many of the serious limitations. Michaud identifies and explains five powerful techniques--improved estimation, application of benchmark priors, integration of active forecasts, tests for efficiency, and tests for portfolio weights--that portfolio managers can use to reduce errors, increase precision, and enhance the value of seemingly optimized portfolios. He illustrates the impact of each method with a simple asset allocation problem. With its important implications for investment practice, Efficient Asset Management's highly intuitive yet rigorous approach to defining optimal portfolios will appeal to investment management executives, consultants, brokers, and anyone seeking to stay abreast of current investment technology. Through practical examples and illustrations, Michaud updates the practice of optimization for modern investment management.

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Contents

Introduction
1
Classic MeanVariance Optimization
7
Mathematical Formulation of MeanVariance
20
Copyright

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About the author (1998)


Richard Michaud is a senior vice president of Acadian Asset Management in Boston, a director of the Institute for Quantitative Research in Finance, and an editorial board member of the Financial Analysts Journal.

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