Risk-Return Analysis: The Theory and Practice of Rational Investing (Volume One) - Hardcover

Markowitz

Hardcover

ISBN 10: 007181793X ISBN 13: 9780071817936

Verlag: McGraw Hill, 2013

Inhaltsangabe

The two most important words Harry Markowitz ever wrote are "portfolio selection." In 1952, when everyone in the stock market was looking for the next hot stock, as a doctoral candidate, he proposed to look at many, diverse stocks--a portfolio. He laid the first cornerstone of Modern Portfolio Theory and defended the idea that strategic asset growth means factoring in the risk of an investment. More than 60 years later, the father of modern finance revisits his original masterpiece, describes how his theory has developed, and proves the vitality of his risk-return analysis in the current global economy. Risk-Return Analysis opens the door to a groundbreaking four-book series giving readers a privileged look at the personal reflections and current strategies of a luminary in finance. This first volume is Markowitz's response to what he calls the "Great Confusion" that spread when investors lost faith in the diversification benefits of MPT during the financial crisis of 2008. It demonstrates why MPT never became ineffective during the crisis, and how you can continue to reap the rewards of managed diversification into the future. Economists and financial advisors will benefit from the potent balance of theory and hard data on mean-variance analysis aimed at improving decision-making skills. Written for the academic and the practitioner with some math skills (mostly high school algebra), this richly illustrated guide arms you with: Concrete steps to accurately select and apply the right risk measures in a given circumstance Rare surveys of a half-century of literature covering the applicability of MPT Empirical data showing mean and riskmeasure used to maximize return in the long term PRAISE FOR RISK-RETURN ANALYSIS "Harry Markowitz invented portfolio analysis and presented the theory in his famous 1952 article and 1959 book. Nobody has greater insight into the process than Harry. No academic or practitioner can truly claim to understand portfolio analysis unless they have read this volume." -- Martin J. Gruber, Professor Emeritus and Scholar in Residence, Stern School of Business, New York University "Surveying the vast literature inspired by [Markowitz's] own 1959 book has stimulated an outpouring of ideas. He builds on the strengths and limitations of the important papers in order to come up with a position that should silence a lot of critics." -- Jack Treynor, President, Treynor Capital Management "The authors do not overlook various criticisms of the MPT, but rather address them convincingly. This excellent book is an essential reference for academics and practitioners alike." -- Haim Levy, Miles Robinson Professor of Finance, Hebrew University, Jerusalem, Israel "Markowitz's groundbreaking publications on Portfolio Selection prescribe a methodology that a rational decision-maker can follow to optimize his investment portfolio in a risky world. . . . This challenging new book clarifies many common misconceptions about modern portfolio theory." -- Roger C. Gibson, author of Asset Allocation and Chief Investment Officer, Gibson Capital, LLC "Contain[s] great wisdom that every economist, portfolio manager, and investor should savor page by page." -- Andrew W. Lo, Charles E. and Susan T. Harris Professor and Director, Laboratory for Financial Engineering, MIT Sloan School of Management "[Markowitz's] monumental work in the 1950s would be sufficient to qualify as a lifetime achievement for most mortals, but he keeps spouting fresh insights like lightning flashes year after year, and penetrating ever deeper into the theory, mathematics, and practice of investing." -- Martin Leibowitz, Managing Director, Global Research Strategy, Morgan Stanley "Risk-Return Analysis is a wonderful work in progress by a remarkable scholar who alway

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Über die Autorin bzw. den Autor

Harry M. Markowitz is president of Harry Markowitz Co. in San Diego. In 1990, he was jointly awarded the Nobel Prize for economics with Merton Miller and William Sharpe.

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Risk-Return Analysis

The Theory and Practice of Rational Investing

By HARRY M. MARKOWITZ, KENNETH A. BLAY

McGraw-Hill Education

Copyright © 2014 Harry M. Markowitz and Kenneth A. Blay
All rights reserved.

ISBN: 978-0-07-181793-6

Contents

Foreword
Preface
Acknowledgments
Outline of Plans for Volumes II, III, and IV
1. The Expected Utility Maxim
2. Mean-Variance Approximations to Expected Utility
3. Mean-Variance Approximations to the Geometric Mean
4. Alternative Measures of Risk
5. The Likelihood of Various Return Distributions (With Anthony Tessitore, 
Ansel
Tessitore, and Nilufer Usmen)
Notes
References
Index

<br><h2>CHAPTER 1</h2><p><b>THE EXPECTED UTILITY MAXIM</p><br><p>INTRODUCTION</b></p><p>As explained in the preceding preface to the four parts planned for the presentbook, the fundamental assumptions of Markowitz (1959) are in its Part 4,Chapters 10 through 13. These fundamental assumptions are at the back ratherthan the front of Markowitz (1959) because Markowitz feared that no practitionerwould read a book that began with an axiomatic treatment of the theory ofrational decision making under uncertainty. But now, clearly, these matters havebecome urgent. They bear directly on controversies such as:</p><p>• Under what conditions one should use mean-variance (MV) analysis</p><p>• What should be used in its stead when mean-variance analysis is not applicable</p><p>• How a single-period risk-return analysis relates to its many-period context</p><p>• How parameter uncertainty should be handled</p><br><p>It may seem frivolous to carefully weigh questions such as:</p><p>If an investor prefers Portfolio A to Portfolio B, should that investor preferto go with Portfolio A, or would it be as good or better to toss a coin tochoose between Portfolio A and Portfolio B?</p><p>Or again, if the investor prefers Portfolio A to Portfolio B, should he or sheprefer Portfolio B for sure or a 50-50 chance of A or B?</p><br><p>Perhaps surprisingly, the answers to such questions imply how one should judgealternative measures of risk.</p><p>For example, two measures of risk that have been proposed are (1) standarddeviation and (2) maximum loss. But maximum loss is a risk measure that violatesthe principle that if one prefers Portfolio A to Portfolio B, one should prefera chance of Portfolio A to the certainty of Portfolio B. For example, supposethat Portfolio A has a 50-50 chance of a 30 percent gain or a 10 percent loss,whereas Portfolio B has a 50-50 chance of a 40 percent gain or a 20 percentloss. Both have an expected (a.k.a. average or "mean") return of 10 percent.Portfolio A has a standard deviation of 20 percent and a maximum loss of 10percent, whereas Portfolio B has a standard deviation of 30 percent and amaximum loss of 20 percent. Thus, by either criterion of risk—standard deviationor maximum loss—Portfolio A is preferable to Portfolio B. If one flips a coin todecide between Portfolio A and Portfolio B, the whole process (flip a coin, thenchoose one portfolio or the other accordingly) has a lower standard deviationthan just choosing Portfolio B, but the process has the <i>same maximum possibleloss</i> as just choosing B. The most you can lose by either choice is 20 percent.Thus the maximum loss criterion violates the desideratum to prefer a chance of abetter thing to the certainty of a worse thing. If one accepts the latter, thenmaximum loss is not even permitted into the contest between alternative riskmeasures.</p><p>This chapter generalizes this discussion. In roughly the following order, it:</p><p>• Defines certain concepts, including the expected utility maxim</p><p>• Describes the properties of expected utility maximization, including whetherpreferences determine utility numbers uniquely and what shape utility functionencourages portfolio diversification</p><p>• Contrasts the HDM (human decision maker) with the RDM (rational decisionmaker), the latter being the topic of this book</p><p>• Discusses objections that have been raised to the expected utility rule andhow these confuse the behavior observed in an HDM with that to be expected froman RDM</p><p>• Presents three decision-choice "axioms" that we believe it is reasonable toexpect of an RDM</p><p>• Refers the reader to a proof [in Markowitz (1959)] that a decision maker whoacts consistently with the aforementioned axioms must necessarily act accordingto the expected utility rule</p><p>• Ties up an important loose end</p><br><p>Subsequent chapters of this part of the book consider the merits of variousrisk-return criteria as approximations to the expected utility rule. As noted inthe preface, subsequent parts are planned that will consider rational decisionmaking over time with known odds, rational decision making when odds are notknown, and certain implementation considerations, especially the division oflabor among computers, data, algorithms, and judgment.</p><p>This chapter and the three that follow may all seem very academic, but thetopics covered are, in fact, of central importance in practice. Few, if any,decisions are more important in the actual use of risk-return analysis than thechoice of risk mmeasure. A false statement on the subject—such as, "The use ofvariance as a risk measure assumes that return distributions are normallydistributed"—ccan be stated in a fraction of a sentence and then left as self-evident, but an accurate, nuanced account of the topic—including a descriptionof the boundaaaaries where mean-variance (MV) approximations begin to break down—requiresmore space.</p><br><p><b>DEFINITIONS</b></p><p>In this section, we define the terminology used in our discussion of the maximumexpected utility rule. Imagine an RDM who must choose between alternativeprobability distributions such as</p><p>[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]</p><p>After the RDM selects one such distribution, a wheel is spun and—eventually—theoutcome is announced. The RDM can make no relevant decision between the choiceof a probability distribution and the announcement of the outcome. This absenceof possibly relevant intervening decisions characterizes this as a single-periodchoice situation. See Markowitz (1959), Chapter 11, the section entitled"Intermediate Decisions, Incomplete Outcomes"...

Details zur Ausgabe

• Verlag: McGraw Hill
• Erscheinungsdatum: 2013
• Sprache: Englisch
• ISBN 10: 007181793X
• ISBN 13: 9780071817936
• Einband: Gebundene Ausgabe
• Anzahl der Seiten: 270
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: gpsr@libri.de; gpsr@libri.de; ; Friedensallee 273; Hamburg; 22763; Deutschland