The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

CHAPTER 7

Asset Allocation and Portfolio Construction

Noël Amenc, Ph.D. Professor of Finance, EDHEC Business School Director, EDHEC-Risk Institute

 

Felix Goltz, Ph.D. Head of Applied Research, EDHEC-Risk Institute

 

Lionel Martellini, Ph.D. Professor of Finance, EDHEC Business School Scientific Director, EDHEC-Risk Institute

 

Vincent Milhau, Ph.D. Senior Research Engineer, EDHEC-Risk Institute

 

 

 

 

 

Asset management is justified as an industry by the capacity of adding value through the design of investment solutions that match investors’ needs. For more than 50 years, the industry has in fact mostly focused on security selection decisions as a single source of added value. This sole focus has somewhat distracted the industry from another key source of added value, namely portfolio construction and asset allocation decisions. In the face of recent crises, and given the intrinsic difficulty in delivering added-value through security selection decisions only, the relevance of the old paradigm has been questioned with heightened intensity, and a new paradigm is starting to emerge.

In a nutshell, the new paradigm recognizes that the art and science of portfolio management consists of constructing dedicated portfolio solutions, as opposed to one-size-fits-all investment products, so as to reach the return objectives defined by the investor, while respecting the investor’s constraints expressed in terms of (absolute or relative) risk budgets. In this broader context, asset ...