Preface xvii

Acknowledgments xix

Introduction xxi

CHAPTER 1 The Portfolio Management Process and the Investment Policy Statement 1

1 Introduction 1

2 Investment Management 2

3 The Portfolio Perspective 4

4 Portfolio Management as a Process 4

5 The Portfolio Management Process Logic 5

6 Investment Objectives and Constraints 11

7 The Dynamics of the Process 17

8 The Future of Portfolio Management 18

9 The Ethical Responsibilities of Portfolio Managers 18

CHAPTER 2 Managing Individual Investor Portfolios 20

1 Introduction 20

2 CaseStudy 21

3 Investor Characteristics 24

4 Investment Policy Statement 34

5 An Introduction to Asset Allocation 50

CHAPTER 3 Managing Institutional Investor Portfolios 63

1 Overview 63

2 PensionFunds 64

3 Foundations and Endowments 85

4 The Insurance Industry 101

5 Banks and Other Institutional Investors 120

CHAPTER 4 Capital Market Expectations 128

1 Introduction 128

2 Organizing the Task: Framework and Challenges 129

3 Tools for Formulating Capital Market Expectations 146

4 Economic Analysis 174

CHAPTER 5 Asset Allocation 230

1 Introduction 230

2 What is Asset Allocation? 231

3 Asset Allocation and the Investor’s Risk and Return Objectives 236

4 The Selection of Asset Classes 248

5 The Steps in Asset Allocation 254

6 Optimization 257

7 Implementing the Strategic Asset Allocation 296

8 Strategic Asset Allocation for Individual Investors 299

9 Strategic Asset Allocation for Institutional Investors 307

10 Tactical Asset Allocation 320

CHAPTER 6 Fixed-Income Portfolio Management 328

1 Introduction 328

2 A Framework for Fixed-Income Portfolio Management 329

3 Managing Funds Against a Bond Market Index 331

4 Managing Funds Against Liabilities 346

5 Other Fixed-Income Strategies 369

6 International Bond Investing 390

7 Selecting a Fixed-Income Manager 402

CHAPTER 7 Equity Portfolio Management 407

1 Introduction 407

2 The Role of the Equity Portfolio 408

3 Approaches to Equity Investment 410

4 Passive Equity Investing 412

5 Active Equity Investing 429

6 Semiactive Equity Investing 455

7 Managing a Portfolio of Managers 458

8 Identifying, Selecting, and Contracting with Equity Portfolio Managers 466

9 Structuring Equity Research and Security Selection 474

CHAPTER 8 Alternative Investments Portfolio Management 477

1 Introduction 477

2 Alternative Investments: Definitions, Similarities, and Contrasts 478

3 Real Estate 485

4 Private Equity/Venture Capital 498

5 Commodity Investments 516

6 Hedge Funds 530

7 Managed Futures 557

8 Distressed Securities 568

CHAPTER 9 Risk Management 579

1 Introduction 579

2 Risk Management as a Process 580

3 Risk Governance 583

4 Identifying Risks 585

5 Measuring Risk 596

6 Managing Risk 624

CHAPTER 10 Execution of Portfolio Decisions 637

1 Introduction 637

2 The Context of Trading: Market Microstructure 638

3 The Costs of Trading 653

4 Types of Traders and Their Preferred Order Types 663

5 Trade Execution Decisions and Tactics 666

6 Serving the Client’s Interests 678

7 Concluding Remarks 681

CHAPTER 11 Monitoring And Rebalancing 682

1 Introduction 682

2 Monitoring 683

3 Rebalancing the Portfolio 701

4 Concluding Remarks 716

CHAPTER 12 Evaluating Portfolio Performance 717

1 Introduction 717

2 The Importance of Performance Evaluation 718

3 The Three Components of Performance Evaluation 719

4 Performance Measurement 720

5 Benchmarks 731

6 Performance Attribution 744

7 Performance Appraisal 766

8 The Practice of Performance Evaluation 775

CHAPTER 13 Global Investment Performance Standards 783

1 Introduction 783

2 Background of the GIPS Standards 784

3 Provisions of the GIPS Standards 792

4 Verification 840

5 GIPS Advertising Guidelines 845

6 Other Issues 847

Appendix: GIPS Glossary 856

Glossary 864

References 888

About the CFA Program 903

About the Authors 904

Index 913