the theory of active portfolio management

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1、Chapter27:TheTheoryofActivePortfolioManagementChapterOpenerp.926THISCHAPTERCONSIDERSthepracticalprocessofconstructingoptimalportfoliosthatanactiveportfoliomanagercanofferclients.Itmightseemthattheword“theory”inthechaptertitleisinconsistentwiththispracticalgoal,andthattheforegoingchapters

2、mustalreadyhaveexhaustedtheknowledgethattheoristscanimparttothosewhopracticeportfoliomanagementinthefield—therestwouldbeuptotheinvestmentmanagersinthetrenches.   Wewillsee,however,thattheoryhasasignificantcontributiontoofferevenwhenitcomestothedailygrindofputtingitalltogether.Webeginwith

3、anotherlookattheportfoliooptimizationprocedureusingthesingle-indexmodelproposedbyTreynorandBlack,firstpresentedinChapter8.Wediscusspracticalproblemsthatarisefromthepropertiesofthesolutionandhowtoeffectivelyhandlethem.Wediscussthecriticalissueofhowtohandlethelimitedaccuracyofalphaforecast

4、swhenimplementingtheTreynor-Blackmodel.Armedwiththeseinsights,wepresentaprototypeorganizationalchartanddiscusstheefficacyoffittingtheorganizationtothetheoreticalunderpinningofportfoliomanagement.   Inthenextsection,wepresenttheBlack-Littermanmodelthatallowsflexibleviewsabouttheexpectedre

5、turnsofassetclassestoimproveassetallocation.Finally,welookintothepotentialprofitabilityofsecurityanalysisandendwithconcludingremarks.AnappendixtothechapterpresentsthemathematicsunderlyingtheBlack-Littermanmodel.27.1OptimalPortfoliosandAlphaValuesInChapter8weshowedhowtoformanoptimalriskyp

6、ortfoliowithasingle-indexmodel.Table27.1summarizesthestepsinthisoptimization,commonlyknownastheTreynor-Blackmodel.Theoutlinedprocedureusestheindexmodelthatignoresnonzerocovariancevaluesacrossresiduals.Thisissometimescalledthediagonalmodel,becauseitassumesthatthecovariancematrixofresidual

7、shasnonzeroentriesonlyonthediagonals.Whilethediagonalmodelisaspecialcasethatoffersconsiderablesimplification,weknowfromChapter7that,ifnecessary,wealwayscanresorttothefull-blownMarkowitzalgorithmthatallowsforcorrelationamongresiduals.Moreover,wesawthatdespitethesignificant