Portfolio Theory and Management

Portfolio management is an ongoing process of constructing portfolios that balances an investor's objectives with the portfolio manager's expectations about the future. This dynamic process provides the payoff for investors. Portfolio management evaluates individual assets or investments by their contribution to the risk and return of an investor's portfolio rather than in isolation. This is called the portfolio perspective. Thus, by constructing a diversified portfolio, a portfoliomanager can reduce risk for a given level of expected return, compared to investing in an individual asset or security. According to modern portfolio theory (MPT), investors who do not follow a portfolio perspective bear risk that is not rewarded with greater expected return. Portfoliodiversification works best when financial markets are operating normally compared to periods of market turmoil such as the 2007-2008 financial crisis. During periods of turmoil, correlations tend to increase thus reducing the benefits of diversification.Portfolio management today emerges as a dynamic process, which continues to evolve at a rapid pace. The purpose of Portfolio Theory and Management is to take readers from the foundations of portfolio management with the contributions of financial pioneers up to the latest trends emerging within the context of special topics. The book includes discussions of portfolio theory and management both before and after the 2007-2008 financial crisis. This volume provides a critical reflection of whatworked and what did not work viewed from the perspective of the recent financial crisis. Further, the book is not restricted to the U.S. market but takes a more global focus by highlighting cross-country differences and practices.This 30-chapter book consists of seven sections. These chapters are: (1) portfolio theory and asset pricing, (2) the investment policy statement and fiduciary duties, (3) asset allocation and portfolio construction, (4) risk management, (V) portfolio execution, monitoring, and rebalancing, (6) evaluating and reporting portfolio performance, and (7) special topics.

H. Kent Baker is Professor of Finance and Kogod Research Professor, American University

Greg Filbeck is Samuel P. Black III Professor of Insurance and Risk Management, Pennsylvania State University

Acknowledgments
Chapter 1 Portfolio Theory and Management: An Overview - H. Kent Baker and Greg Filbeck
Section I. Portfolio Theory and Asset Pricing
Chapter 2 Modern Portfolio Theory - Eric Jacquier
Chapter 3 Asset Pricing Theories, Models, and Tests - Nikolay Gospodinov and Cesare Robotti
Chapter 4 Asset Pricing and Behavioral Finance - Hersh Shefrin

Section II. The Investment Policy Statement and Fiduciary Duties
Chapter 5 Assessing Risk Tolerance - Sherman D. Hanna, Michael A. Guillemette, and Michael S. Finke
Chapter 6 Private Wealth Management - Dianna Preece
Chapter 7 Institutional Wealth Management - Eric J. Robbins
Chapter 8 Fiduciary Duties and Responsibilities of Portfolio Managers - Remus D. Valsan and Moin A. Yahya

Section III. Asset Allocation and Portfolio Construction
Chapter 9 The Role of Asset Allocation in the Investment Decision-Making Process - James L. Farrell, Jr.
Chapter 10 Asset Allocation Models - J. Clay Singleton
Chapter 11 Preference Models in Portfolio Construction and Evaluation - Massimo Guidolin
Chapter 12 Portfolio Construction with Downside Risk - Harald Lohre, Thorsten Neumann, and Thomas Winterfeldt
Chapter 13 Asset Allocation with Downside Risk Management - Joshua M. Davis and Sebastien Page
Chapter 14 Alternative Investments - Lars Helge Hass, Denis Schweizer, Juliane Proelss

Section IV. Risk Management
Chapter 15 Measuring and Managing Market Risk - Christoph Kaserer
Chapter 16 Measuring and Managing Credit and Other Risks - Gabriele Sabato

Section V. Portfolio Execution, Monitoring, and Rebalancing
Chapter 17 Trading Strategies, Portfolio Monitoring, and Rebalancing - Ricardo Cesari and Massimiliano Marzo
Chapter 18 Effective Trade Execution - Ricardo Cesari, Massimiliano Marzo, and Paolo Zagalia
Chapter 19 Market Timing Methods and Results - Panagiotis Schizas

Section VI. Evaluating and Reporting Portfolio Performance
Chapter 20 Evaluating Portfolio Performance: Reconciling Asset Selection and Market Timing - Arnaud Cavé, Georges Hübner, and Thomas Lejeune
Chapter 21 Benchmarking - Abraham Lioui and Patrice Poncet
Chapter 22 Attribution Analysis - Nanne Brunia and Auke Plantinga
Chapter 23 Equity Investment Styles - Andrew Mason
Chapter 24 Use of Derivatives - Matthieu Leblanc
Chapter 25 Performance Presentation - Timothy P. Ryan

Section VII. Special Topics
Chapter 26 Exchange Traded Funds: The Success Story of the Last Two Decades - Gerasimos G. Rompotis
Chapter 27 The Past, Present, and Future of Hedge Funds - Roland Füss and Sarah Müller
Chapter 28 Portfolio and Risk Management for Private Equity Fund Investments - Niklas Wagner and Axel Buchner
Chapter 29 Venture Capital - Paschal Gantenbein, Reto Forrer, and Nils Herold
Chapter 30 Socially Responsible Investing - Hunter Holzhauer