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

KEY POINTS

• Meeting the challenges of modern investment practice involves the design of novel forms of investment solutions, as opposed to investment products, customized to meet investors’ expectations.

• These new forms of investment solutions rely on the use of improved, more efficient performance-seeking portfolio and liability-hedging portfolio building blocks, as well as on the use of improved dynamic allocation strategies.

• While each of these ingredients can be found in various current investment products, it is only by putting the pieces of the puzzle together, and by combining all these sources of expertise, that the asset management industry will satisfactorily address investors’ needs.

• From the technical perspective, these advanced investment solutions also rely on a sophisticated exploitation of the benefits of the three competing approaches to risk management, namely risk diversification (key ingredient in the design of better benchmarks for performance-seeking portfolios), risk hedging (key ingredient in the design of better benchmarks for hedging portfolios) and risk insurance (key ingredient in the design of better dynamic asset allocation benchmarks for long-term investors facing short-term constraints), each of which represents a so far largely unexplored potential source of added-value for the asset management industry.

• Risk management is often mistaken for risk measurement. This is a problem since the capacity of properly measuring risk is at best ...