Richard Grinold - Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Controlling Risk

ACTIVE PORTFOLIO MANAGEMENT

A QUANTITATIVE APPROACH FOR PROVIDING SUPERIOR RETURNS AND CONTROLLING RISK

SECOND EDITION

RICHARD C. GRINOLD
RONALD N. KAHN

Copyright 2000 by Richard C. Grinold and Ronald N. Kahn. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

ISBN: 978-0-07-137695-2

MHID: 0-07-137695-X

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To Leilani and to Bonnie

Chapter 1
Introduction

PART ONE
FOUNDATIONS

Chapter 2
Consensus Expected Returns: The Capital Asset Pricing Model

Chapter 3
Risk

Chapter 4
Exceptional Return, Benchmarks, and Value Added

Chapter 5
Residual Risk and Return: The Information Ratio

Chapter 6
The Fundamental Law of Active Management

PART TWO
EXPECTED RETURNS AND VALUATION

Chapter 7
Expected Returns and the Arbitrage Pricing Theory

Chapter 8
Valuation in Theory

Chapter 9
Valuation in Practice

PART THREE
INFORMATION PROCESSING

Chapter 10
Forecasting Basics

Chapter 11
Advanced Forecasting

Chapter 12
Information Analysis

Chapter 13
The Information Horizon

PART FOUR
IMPLEMENTATION

Chapter 14
Portfolio Construction

Chapter 15
Long/Short Investing

Chapter 16
Transactions Costs, Turnover, and Trading

Chapter 17
Performance Analysis

Chapter 18
Asset Allocation

Chapter 19
Benchmark Timing

Chapter 20
The Historical Record for Active Management

Chapter 21
Open Questions

Chapter 22
Summary

Appendix A
Standard Notation

Appendix B
Glossary

Appendix C
Return and Statistics Basics

Why a second edition? Why take time from busy lives? Why devote the energy to improving an existing text rather than writing an entirely new one? Why toy with success?

The short answer is: our readers. We have been extremely gratified by Active Portfolio Managements reception in the investment community. The book seems to be on the shelf of every practicing or aspiring quantitatively oriented investment manager, and the shelves of many fundamental portfolio managers as well.

But while our readers have clearly valued the book, they have also challenged us to improve it. Cover more topics of relevance to today. Add empirical evidence where appropriate. Clarify some discussions.

The long answer is that we have tried to improve Active Portfolio Management along exactly these dimensions.

First, we have added significant amounts of new material in the second edition. New chapters cover Advanced Forecasting (Chap. 11), The Information Horizon (Chap. 13), Long/Short Investing (Chap. 15), Asset Allocation (Chap. 18), The Historical Record for Active Management (Chap. 20), and Open Questions (Chap. 21).

Some previously existing chapters also cover new material. This includes a more detailed discussion of risk (Chap. 3), dispersion (Chap. 14), market impact (Chap. 16), and academic proposals for performance analysis (Chap. 17).

Second, we receive exhortations to add more empirical evidence, where appropriate. At the most general level: how do we know this entire methodology works? .

At the more detailed level, readers have wanted more information on typical numbers for information ratios and active risk. includes empirical distributions of asset level risk statistics.