book

Modern Portfolio Theory: Foundations, Analysis, and New Developments, + Website

by Jack Clark Francis, Dongcheol Kim

January 2013

Intermediate to advanced

554 pages

17h 42m

English

Wiley

Read now

Unlock full access

Cover
Series Page
Title Page
Copyright
Dedication
Preface
Chapter 1: Introduction
1.1 The Portfolio Management Process1.2 The Security Analyst's Job1.3 Portfolio Analysis1.4 Portfolio Selection1.5 The Mathematics Is Segregated1.6 Topics to Be DiscussedAppendix: Various Rates of ReturnNotes
Part One: Probability Foundations
Chapter 2: Assessing Risk
2.1 Mathematical Expectation2.2 What Is Risk?2.3 Expected Return2.4 Risk of a Security2.5 Covariance of Returns2.6 Correlation of Returns2.7 Using Historical Returns2.8 Data Input Requirements2.9 Portfolio Weights2.10 A Portfolio's Expected Return2.11 Portfolio Risk2.12 Summary of Notations and FormulasNotes
Chapter 3: Risk and Diversification
3.1 Reconsidering Risk3.2 Utility Theory3.3 Risk-Return Space3.4 Diversification3.5 ConclusionsNotes

Part Two: Utility Foundations
Chapter 4: Single-Period Utility Analysis
4.1 Basic Utility Axioms4.2 The Utility of Wealth Function4.3 Utility of Wealth and Returns4.4 Expected Utility of Returns4.5 Risk Attitudes4.6 Absolute Risk Aversion4.7 Relative Risk Aversion4.8 Measuring Risk Aversion4.9 Portfolio Analysis4.10 Indifference Curves4.11 Summary and ConclusionsAppendix: Risk Aversion and Indifference CurvesNotes
Part Three: Mean-Variance Portfolio Analysis
Chapter 5: Graphical Portfolio Analysis
5.1 Delineating Efficient Portfolios5.2 Portfolio Analysis Inputs5.3 Two-Asset Isomean Lines5.5 Three-Asset Portfolio Analysis5.6 Legitimate Portfolios5.7 “Unusual” Graphical Solutions Don't Exist5.8 Representing Constraints Graphically5.9 The Interior Decorator Fallacy5.10 SummaryAppendix: Quadratic EquationsNotes
Chapter 6: Efficient Portfolios
6.1 Risk and Return for Two-Asset Portfolios6.2 The Opportunity Set6.5 Markowitz Diversification6.6 Efficient Frontier without the Risk-Free Asset6.7 Introducing a Risk-Free Asset6.8 Summary and ConclusionsAppendix: Equations for a Relationship Between E(rp) and σpNotes
Chapter 7: Advanced Mathematical Portfolio Analysis
7.1 Efficient Portfolios without a Risk-Free Asset7.2 Efficient Portfolios with a Risk-Free Asset7.3 Identifying the Tangency Portfolio7.4 Summary and ConclusionsAppendix: Mathematical Derivation of the Efficient FrontierNotes
Chapter 8: Index Models and Return-Generating Process
8.1 Single-Index Models8.2 Efficient Frontier and the Single-Index Model8.3 Two-Index Models8.4 Multi-Index Models8.5 ConclusionsAppendix: Index ModelsNotes
Part Four: Non-Mean-Variance Portfolios
Chapter 9: Non-Normal Distributions of Returns
9.1 Stable Paretian Distributions9.2 The Student's t-Distribution9.3 Mixtures of Normal Distributions9.4 Poisson Jump-Diffusion Process9.5 Lognormal Distributions9.6 ConclusionsNotes
Chapter 10: Non-Mean-Variance Investment Decisions
10.1 Geometric Mean Return Criterion10.2 The Safety-First Criterion10.3 Semivariance Analysis10.4 Stochastic Dominance Criterion10.5 Mean-Variance-Skewness Analysis10.6 Summary and ConclusionsAppendix A: Stochastic DominanceAppendix B: Expected Utility as a Function of Three MomentsNotes
Chapter 11: Risk Management: Value at Risk
11.1 VaR of a Single Asset11.2 Portfolio VaR11.3 Decomposition of a Portfolio's VaR11.4 Other VaRs11.5 Methods of Measuring VaR11.6 Estimation of Volatilities11.7 The Accuracy of VaR Models11.8 Summary and ConclusionsAppendix: The Delta-Gamma MethodNotes
Part Five: Asset Pricing Models
Chapter 12: The Capital Asset Pricing Model
12.1 Underlying Assumptions12.2 The Capital Market Line12.3 The Capital Asset Pricing Model12.4 Over- and Under-priced Securities12.5 The Market Model and the CAPM12.6 Summary and ConclusionsAppendix: Derivations of the CAPMNotes
Chapter 13: Extensions of the Standard CAPM
13.1 Risk-Free Borrowing or Lending13.2 Homogeneous Expectations13.3 Perfect Markets13.4 Unmarketable Assets13.5 Summary and ConclusionsAppendix: Derivations of A Non-Standard CAPMNotes
Chapter 14: Empirical Tests of the CAPM
14.1 Time-Series Tests of the CAPM14.2 Cross-Sectional Tests of the CAPM14.3 Empirical Misspecifications in Cross-Sectional Regression Tests14.4 Multivariate Tests14.5 Is the CAPM Testable?14.6 Summary and ConclusionsNotes
Chapter 15: Continuous-Time Asset Pricing Models
15.1 Intertemporal CAPM (ICAPM)15.2 The Consumption-Based CAPM (CCAPM)15.3 ConclusionsAppendix: Lognormality and the Consumption-Based CAPMNotes
Chapter 16: Arbitrage Pricing Theory
16.1 Arbitrage Concepts16.2 Index Arbitrage16.3 The Asset Pricing Equation16.4 Asset Pricing on a Security Market Plane16.5 Contrasting APT with CAPM16.6 Empirical Evidence16.7 Comparing the APT and CAPM Empirically16.8 ConclusionsNotes
Part Six: Implementing the Theory
Chapter 17: Portfolio Construction and Selection
17.1 Efficient Markets17.2 Using Portfolio Theories to Construct and Select Portfolios17.3 Security Analysis17.4 Market Timing17.5 Diversification17.6 Constructing an Active Portfolio17.7 Portfolio Revision17.8 Summary and ConclusionsAppendix: Proofs for Some Ratios from Active PortfoliosNotes
Chapter 18: Portfolio Performance Evaluation
18.1 Mutual Fund Returns18.2 Portfolio Performance Analysis in the Good Old Days18.3 Capital Market Theory Assumptions18.4 Single-Parameter Portfolio Performance Measures18.5 Market Timing18.6 Comparing Single-Parameter Portfolio Performance Measures18.7 The Index of Total Portfolio Risk (ITPR) and the Portfolio Beta18.8 Measurement Problems18.9 Do Winners or Losers Repeat?18.10 Summary about Investment Performance EvaluationAppendix: Sharpe Ratio of an Active PortfolioNotes
Chapter 19: Performance Attribution
19.1 Factor Model Analysis19.2 Return-Based Style Analysis19.3 Return Decomposition-Based Analysis19.4 ConclusionsAppendix: Regression Coefficients Estimation with ConstraintsNotes
Chapter 20: Stock Market Developments
20.1 Recent NYSE Consolidations20.2 International Securities Exchange (ISE)20.3 Nasdaq20.4 Downward Pressures on Transactions Costs20.5 The Venerable Limit Order20.6 Market Microstructure20.7 High-Frequency Trading20.8 Alternative Trading Systems (ATSs)20.9 Algorithmic Trading20.10 Symbiotic Stock Market Developments20.11 Detrimental Stock Market Developments20.12 Summary and ConclusionsNotes
Mathematical Appendixes
Appendix A. Expectation ProofsAppendix B. Simultaneous Solution of Linear EquationsAppendix C. Linearly Dependent EquationsAppendix D. Matrix and Vector Differentiation
Bibliography
About the Authors
Author Index
Subject Index

Overview

A through guide covering Modern Portfolio Theory as well as the recent developments surrounding it

Modern portfolio theory (MPT), which originated with Harry Markowitz's seminal paper "Portfolio Selection" in 1952, has stood the test of time and continues to be the intellectual foundation for real-world portfolio management. This book presents a comprehensive picture of MPT in a manner that can be effectively used by financial practitioners and understood by students.

Modern Portfolio Theory provides a summary of the important findings from all of the financial research done since MPT was created and presents all the MPT formulas and models using one consistent set of mathematical symbols. Opening with an informative introduction to the concepts of probability and utility theory, it quickly moves on to discuss Markowitz's seminal work on the topic with a thorough explanation of the underlying mathematics.

Analyzes portfolios of all sizes and types, shows how the advanced findings and formulas are derived, and offers a concise and comprehensive review of MPT literature
Addresses logical extensions to Markowitz's work, including the Capital Asset Pricing Model, Arbitrage Pricing Theory, portfolio ranking models, and performance attribution
Considers stock market developments like decimalization, high frequency trading, and algorithmic trading, and reveals how they align with MPT
Companion Website contains Excel spreadsheets that allow you to compute and graph Markowitz efficient frontiers with riskless and risky assets

If you want to gain a complete understanding of modern portfolio theory this is the book you need to read.

Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
and much more.

Read now

Unlock full access

More than 5,000 organizations count on O’Reilly

O’Reilly covers everything we've got, with content to help us build a world-class technology community, upgrade the capabilities and competencies of our teams, and improve overall team performance as well as their engagement.

Julian F.

Head of Cybersecurity

I wanted to learn C and C++, but it didn't click for me until I picked up an O'Reilly book. When I went on the O’Reilly platform, I was astonished to find all the books there, plus live events and sandboxes so you could play around with the technology.

Addison B.

Field Engineer

I’ve been on the O’Reilly platform for more than eight years. I use a couple of learning platforms, but I'm on O'Reilly more than anybody else. When you're there, you start learning. I'm never disappointed.

Amir M.

Data Platform Tech Lead

I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.