Asset Allocation

Discover a masterful exploration of the fallacies and challenges of asset allocation

In Asset Allocation: From Theory to Practice and Beyond—the newly and substantially revised Second Edition of A Practitioner’s Guide to Asset Allocation—accomplished finance professionals William Kinlaw, Mark P. Kritzman, and David Turkington deliver a robust and insightful exploration of the core tenets of asset allocation.

Drawing on their experience working with hundreds of the world’s largest and most sophisticated investors, the authors review foundational concepts, debunk fallacies, and address cutting-edge themes like factor investing and scenario analysis. The new edition also includes references to related topics at the end of each chapter and a summary of key takeaways to help readers rapidly locate material of interest.

The book also incorporates discussions of:

• The characteristics that define an asset class, including stability, investability, and similarity
• The fundamentals of asset allocation, including definitions of expected return, portfolio risk, and diversification
• Advanced topics like factor investing, asymmetric diversification, fat tails, long-term investing, and enhanced scenario analysis as well as tools to address challenges such as liquidity, rebalancing, constraints, and within-horizon risk.

Perfect for client-facing practitioners as well as scholars who seek to understand practical techniques, Asset Allocation: From Theory to Practice and Beyond is a must-read resource from an author team of distinguished finance experts and a forward by Nobel prize winner Harry Markowitz.

Foreword to the First Edition

Preface

Key Takeaways

Chapter 1: What is an asset class

Chapter 2: Fundamentals of asset allocation

Chapter 3: The importance of asset allocation

Chapter 4: Time diversification

Chapter 5: Divergence

Chapter 6: Correlation asymmetry

Chapter 7: Error maximization

Chapter 8: Factors

Chapter 9: 1/N

Chapter 10: Policy portfolios

Chapter 11: The private equity leverage myth

Chapter 12: Necessary conditions for mean-variance analysis

Chapter 13: Forecasting

Chapter 14: The stock-bond correlation

Chapter 15: Constraints

Chapter 16: Asset allocation versus factor investing

Chapter 17: Illiquidity

Chapter 18: Currency risk

Chapter 19: Estimation error

Chapter 20: Leverage versus concentration

Chapter 21: Rebalancing

Chapter 22: Regime shifts

Chapter 23: Scenario analysis

Chapter 24: Stress testing

Chapter 25: Statistical and theoretical concepts

Glossary

Index

WILLIAM KINLAW, CFA, is a Senior Managing Director and Global Head of State Street's academic affiliate, State Street Associates, a unique partnership that bridges the worlds of financial theory and practice.

MARK KRITZMAN, CFA, is a Founding Partner and Chief Executive Officer of Windham Capital Management, LLC and the Chairman of Windham’s investment committee. He is responsible for managing research activities and investment advisory services. He is also a Founding Partner of State Street Associates and teaches a graduate course at the Massachusetts Institute of Technology.

DAVID TURKINGTON, CFA, is a Senior Managing Director and Head of Portfolio and Risk Research at State Street Associates.

In Asset Allocation: From Theory to Practice and Beyond, an award-winning team of pioneers in the field deliver an innovative toolkit that will empower you to tackle the most crucial decision in modern investing. Drawing on their experience working with hundreds of the world’s largest and most sophisticated asset allocators, they offer a fresh perspective on the field’s 70-year theoretical lineage, dispel persistent and dangerous fallacies, and propose solutions to some of the subject’s most vexing challenges.

You’ll learn how to improve subjective, finger-in-the-wind scenario analysis with a scientific approach that is rigorous yet intuitive. You’ll discover how to translate liquidity risk into units of portfolio return and risk so that you can make informed decisions rather than resorting to arbitrary rules of thumb. You’ll also find out how to integrate factor-based investing with traditional asset allocation in an efficient and transparent way.

If you need answers in a hurry, you’ll find a “Key Takeaways” section with digestible bullet points that summarize each chapter’s core conclusions. If you want to dig deeper, you’ll find a comprehensive glossary as well as a concise review of the theoretical and statistical concepts that underpin modern investment management, complete with formulas and references for further reading.

Complete with intuitive examples and helpful analogies, other chapters cover topics as varied as the divergence of long- and short-term risk, asymmetric diversification, dynamic asset allocation, regime shifts, currency hedging, next-generation forecasting techniques, stress testing, leverage, portfolio rebalancing, the stock-bond correlation, and many more.

Perfect for practitioners who recognize that theoretical models—however elegant—must bend to real-world complexities, Asset Allocation: From Theory to Practice and Beyond is an indispensable resource loaded with practical solutions to everyday portfolio management challenges. It’s an authoritative, insightful, and accessible resource from a team of distinguished finance experts and includes a foreword by Nobel Prize winner Harry Markowitz.

Praise for Asset Allocation

"In Asset Allocation: From Theory to Practice and Beyond, Kinlaw, Kritzman, and Turkington have taken their absolutely superb 2017 treatise on asset allocation and investment and managed to make it even better. They identify comprehensively the important and up-to-date questions surrounding asset allocation, many of which are subtle and rather technical. It is remarkable how they manage to explain and address such a wide array in plainly written language, accessible to the least-technical practitioner, while offering rigorous theoretical analysis and empirical findings to satisfy the most-demanding quant. All of this within a compact casing of 200+ pages. Like reducing transactions costs and taxes, avoiding paths of error is among the robust means for improving investment performance. I am thus delighted to see the Fallacies of Asset Allocation section expanded and enhanced. Whether novice student or seasoned professional, the reader is in for a treat: Bon Appetit!"

—Robert C. Merton, School of Management Distinguished Professor of Finance, Massachusetts Institute of Technology; John and Natty McArthur University Professor Emeritus, Harvard University; recipient of the 1997 Alfred Nobel Memorial Prize in Economics Sciences