Ludwig B. Chincarini - Quantitative Equity Portfolio Management

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T his is an ambitious book that both develops the broad range of artillery employed in quantitative equity investment management and also provides the reader with a host of relevant practical examples. While the authors firmly take the view that active management can be rewarded, their book offers a solid practitioners guide to quantitative passive management in the efficient-market/index-fund world on the one hand and to active managers on the other. Far too often quantitative management is equated with passive management, and active quantitative management is thought to be an oxymoron. The authors rigorous dispelling of this tired canard opens the way for the traditional active manager to make use of quantitative tools. Readers of this book soon learn that quantitative management is a technology that they can use to hone their evaluation of their fundamental ideals, implement them successfully, and finally, control the risk of the portfolios they manage while doing so.

Often investment ideas are anomalies that fit uncomfortably, if at all, with neoclassical efficient-market theories. Typically, such anomalies are observations formed from studying historical stock market returns. This book surveys the rich collection of anomalies that form the basis for much of what is current practice in the active quantitative arena. The student of portfolio management who is interested in learning what academics and empiricists have discovered will find this of particular interest. What about the small-firm effect or momentum? This book is an excellent place to introduce the manager to these important anomalies.

But where this book excels is in melding theory with practice. Issues of liquidity, leverage, market neutrality, transactions costs, and the pitfalls and virtues of backtesting that are so often skirted in other treatments take center stage here. So, too, there is an extensive analysis of optimal after-tax portfolio management, a topic often not even mentioned in other books. Throughout this book, the authors expend much useful effort on ridding their analysis of naive reliance on mathematics at the expense of practicality.

While the mathematics can at times be demanding, it is about at the level of the CFA requirements and should be well within the command of the analytic abilities of most portfolio managers.

Helpfully, the prose is lively and far removed from the usual pedantry that surrounds mathematics in finance. Extensive questions test the readers understanding and make this book perfectly suited to the needs of an advanced course in investment management at the MBA or PhD level.

Stephen A. Ross

The late Franco Modigliani Professor of
Finance and Economics

Massachusetts Institute of Technology

T he world of active portfolio management has been changing over the last few years to become more quantitative in nature. This trend is inspiring because it lends itself to a more controlled approach to asset management, which ultimately benefits individual and institutional investors. In some ways quantitative asset management is an old field, but in many ways its a very new field that has bundled together lots of old concepts. It is a vast and diverse field because quantitative managers use a variety of different techniques to manage their portfolios. Despite this diversity, though, there are central themes that remain at the core of the work of most quantitative asset management firms.

When we were first introduced to the field of quantitative portfolio management, we sensed that a lot of the issues it covered were unclear not only to us but also to our colleagues. In fact, there was no formal, authoritative source on the topic. Naturally, through our years at Seoul National University, UC Berkeley, Harvard, and MIT, we learned many of the concepts related to quantitative portfolio management, such as statistics and basic financial theory. And through our years working for portfolio management companies, we learned some of the real-world aspects of the trade. Still, we never really had a comprehensive reference to turn to for an understanding of the nuts and bolts of quantitative equity portfolio management. We also would sometimes see practitioners approach this kind of management with holes in their analytics or listen to academics speak about the theory with no attention to the details of real-world portfolio management. We began teaching the concepts to students at our respective universities and realized that it would be useful to write a book on the subject that attempted to cover the whole spectrum of quantitative equity portfolio management, including the theoretical side and the practical side.