the missing link between academic research and practice. With remarkable clarity, the authors explain how to put risk at the center of portfolio construction. Speaking from experience advising some of the largest pools of assets in the world, they bring the practice and science of risk-based investing to a whole new level, and challenge conventional wisdom along the way. Everyone involved in asset allocation should read this book, including CIOs, quants, non-quants, academics, consultants, portfolio managers, advisors, individual investors, and plan sponsors. It will become a reference for the next wave of innovation in our industry. Bravo!”
—Sébastien Page, CFA, Head of Asset Allocation, T. Rowe Price; author, Beyond Diversification: What Every Investor Needs to Know About Asset Allocation
“Everything you ever wanted and need to know about asset allocation but were afraid to ask, written by three accomplished practitioners who put their money where their mouths are.”
—Andrew W. Lo, Charles E. and Susan T. Harris Professor, MIT Sloan School of Management
Asset Allocation
From Theory to Practice and Beyond
WILLIAM KINLAWMARK KRITZMANDAVID TURKINGTON
Copyright © 2021 by William Kinlaw, Mark Kritzman, and David Turkington. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993, or fax (317) 572-4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data is Available:
9781119817710 (hardback)
9781119817734 (epdf)
9781119817727 (epub)
Cover design: Wiley
Cover Image: © Kentoh/Getty Images
Foreword to the First Edition
A Practitioner’s Guide to Asset Allocation by William Kinlaw, Mark Kritzman, and David Turkington speaks to the “forgotten man” of our field: he or she who interacts with the client and delivers professional investment advice. They are the foot soldiers of our field. Our field has an abundance of articles by academics trying to persuade other academics as to how practitioners should advise clients; articles written by academics for “quantitative” practitioners, who are actually academics, usually employed by large institutional investors, either as window dressing, or to build systems to replace “nonquantitative” academics; textbooks trying to educate students as to how they too can write academic articles – enough of them to achieve tenure – on how practitioners should practice; and, now and then, books written by academics for practitioners on “what every academic knows and I'll try to explain to you.” But there are remarkably few well-written books or articles, by learned scholars, for practitioners, without calculus, on controversial topics of practical importance, on which the scholar has published strong views.
The Kinlaw, Kritzman, and Turkington “Guide” fills this void. Specifically, among its 16 chapters for practitioners (plus an “Addendum” with chapters on statistical concepts and a glossary of terms) is a discussion of why it is not true that the Markowitz optimization procedure maximizes rather than minimizes risk for given return, and why the investment practitioner's clients would not be better served by the practitioner recommending an equal weighted portfolio rather than going through the demanding modern portfolio theory (MPT) process.
This guide should be of interest to practitioners; scholars who seek to develop or evaluate techniques that can be of practical value in practitioners' hands; academics who would like to create, explore, or evaluate, empirically or theoretically, relationships that can guide the development of such techniques; investors (especially institutional investors) who must evaluate alternative current or potential advisors; and broadly read non-finance readers who enjoy a good intellectual fight.
Harry Markowitz, Nobel Prize Recipient, 1990, Economic Sciences; President, Harry Markowitz Company
Preface
Harry Markowitz published his landmark article on portfolio selection more than 60 years ago. This groundbreaking theory empowered generations of academics and practitioners to pursue asset allocation with rigor. Many have made great strides to extend and enhance the application of portfolio theory. And yet, despite all this progress, few would argue that allocating assets effectively is an easy task today. As in many areas of scientific development, progress has been uneven. It has been punctuated with instances of misleading research, which has contributed to the stubborn persistence of certain fallacies about asset allocation. In addition, new markets, technologies, and economic realities continue to present opportunities as well as challenges. Our goal in writing this book is twofold: to describe several important innovations that address key challenges to asset allocation and to dispel certain fallacies about asset allocation.
This book contains the 16 chapters from our 2017 book A Practitioner's
