PORTFOLIO MANAGEMENT：THEORY & PRACTICE


TABLE OF CONTENTS
Preface: Obstacles To Prudent Investment Decision Making ...................................................... 1
Obstacles to Prudent Decision Making ................................................................................ 2
Chapter One: Basic Investment Concepts .................................................................................... 5
Investment Objectives and the Investment Policy Statement ............................................ 5
Investment Prudence............................................................................................................. 7
Market Efficiency ................................................................................................................... 8
Risk ....................................................................................................................................... 11
Diversification ...................................................................................................................... 12
Asset Allocation .................................................................................................................... 17
Chapter Two: Asset Classes And Asset Class Investing ............................................................. 21
U.S. Equities ......................................................................................................................... 21
U.S. Fixed Income ................................................................................................................ 24
International Equity .............................................................................................................. 26
International Bonds ............................................................................................................. 30
Real Estate ........................................................................................................................... 33
Emerging Markets ................................................................................................................ 37
Chapter 3: Dimensions of Risk and Return ................................................................................ 41
Aspects of the U.S. Money Management Industry ............................................................. 41
Value/Growth Asset Class Investing v. Undervalued Stock Picking ................................. 43
The Historical Evidence: Is Value a Strong Law of Asset Pricing? ..................................... 46
The Small Company / Large Company Dimension ............................................................ 50
The Three Factor Model: Empirical Results ........................................................................ 53
Factor Loading and Unsystematic risk ............................................................................... 56
Chapter Four: Building the Portfolio ............................................................................................ 58
The Risk / Return Continuum ............................................................................................. 58
Starting In ................................................................................................................................ 62
Defining Asset Class Weightings ......................................................................................... 63
Chapter Five: Investment Strategies and Investment Vehicles ................................................. 65
Active versus Passive Management ................................................................................... 66
Active Management ............................................................................................................. 66
Performance of Active Managers ........................................................................................ 70
Survivorship Bias ................................................................................................................. 73
Performance Consistency CASE STUDY: THE FORBES MAGAZINE ‘HONOR ROLL’ .......... 74
Evaluating Active Manager Performance ........................................................................... 76
Passive Management .......................................................................................................... 79
Evaluating Passive Fund Performance ............................................................................... 80
Chapter Six: Portfolio Management............................................................................................. 82
Asset Allocation Approaches ............................................................................................... 82
Theoretical Payoffs to Different Asset Management Approaches .................................... 83
Impact of Trading Activity on Portfolio Returns .................................................................. 85
Liquidity Costs of Portfolio Management Strategies ......................................................... 87
Trading Decisions, ‘Best Execution’ and Loss of Investor Wealth .................................... 88
Taxes, Inflation and Turnover .............................................................................................. 89
Conclusion: Independent Investment Counsel ........................................................................... 92
Investment Policy and the Prudent Investor Rule .............................................................. 93
Our Approach to Portfolio Supervision ................................................................................ 93