Asset Allocation. William Kinlaw

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.

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       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 Guide to Asset Allocation, plus 8 additional chapters on topics that have come into sharp focus in recent years. The core tenets of asset allocation do not change over time, but new themes emerge. Designing portfolios and strategies to hedge against downside loss is an important theme today. We include new chapters on the divergence of long-run risk from short-term risk (Chapter 5), the asymmetry of correlations during market gains and losses (Chapter 6), the need for more dynamic asset allocation (Chapter 10), and how to forecast the correlation between stocks and bonds (Chapter 14). Another hot topic is factor investing. We add a new chapter on asset allocation and factor investing, including a way to get the best of both worlds (Chapter 16). As a third theme, we have noticed that many investors benefit from qualitative