Modern Investment Management: An Equilibrium Approach

Modern Investment Management: An Equilibrium Approach

By Bob Litterman, Quantitative Resources Group

* Publisher: Wiley

* Pages: 624
* Publication Date: 2003-07-03
* ISBN-10: 0471124109
* ISBN-13: 9780471124108
* Binding: QQ: 7450911
Product
Description:

Introduces the modern investment management techniques used by Goldman Sachs asset management to a broad range of institutional and sophisticated investors.

* Along with Fischer Black, Bob Litterman created the Black-Litterman asset allocation model, one of the most widely respected and used asset allocation models deployed by institutional investors.

* Litterman and his asset management group are often a driving force behind the asset allocation and investment decision-making of the world's largest 100 pension funds.

Summary: Ignore the Bad Reviews Below

Rating: 5
I am quite shocked by all of the poor reviews below. This text is actually very good, in that it address several topics that Grinold and Kahn do not, mainly utility theory (and its role in investor decision making), the international CAPM, and the Black-Litterman model. First, the presentation of the investment decision making process by Litterman from an economics (utility maximization) view point is right on target. Too often portfolio theory is simply presented in a pure mathematical finance format that, while teaching the mechanics, leaves the end user incapable of understanding the implications of the analysis they are performing. Additionally, Litterman's presentation of the international CAPM and universal hedge models are very well done and extremely important. Finally, the Black-Litterman model has become mainstream (it is incorporated into the Ibbotson software) and is completely ignored by Grinold!

I own both Litterman and Grinold, and if you can afford both I would buy both because Grinold does a nice job simply presenting the mathematics, but then so do so many other texts.

Summary: Crap

Rating: 1
A couple of chps from here are reqd reading for the CFA Level III exam (last exam for CFA charter). I was expecting something MUCH better from GSAM who fancy themselves as the best on the street.

Thankfully, CFAI provided us with the chps and we did not have to purchase the book. Save your money and buy Grinold instead.

Summary: All Blather and No Substance

Rating: 1
The boys at GSAM clearly wrote this book as an "alternative" to Grinold and Kahn and to help promote the group as the seek to raise assets.

Grinold and Kahn work at Barclays Global Investors, GSAM's biggest competitor, and they wrote a first-rate book on how to do quantitative management. Their book has become the standard, the must read, and is required by the CFA exam. This obviously bugged them to no end. It's no fun to see your biggest competitor getting tons of accolades. So they did what anyone with a big ego does: they wrote their own book, this book.

Only problem is this book STINKS. What's the matter with it you ask? It has no content. The boys at GSAM were so scared about divigulging anything that could help a competitor (or the market) that they didn't really want to SAY anything.

Now how do you not say anything but still write a book, you ask? Excellent question! The answer is you talk in infuriatingly broad generalities about very general topics.

For example, on the topic of how do you actually trade the portfolio, they come up with such gems of wisdom as:

"Tradomg is the process of executing the orders derived in the portfolio constrution step. To trade a list of stocks efficiently, investors must balance opportunity costs and execution price against market impact costs." [page 431]

This knowledge anyone who has ever thought for 2 seconds about trading knows. The real value might come if they gave you some cool way to think about measuring opportunity costs, ex-ante. Or a nice way of estimating market impact costs. Do they do either? Of course not! Just more and more banal talk.

The book is filled with millions of other examples. One should use a decay weight in estimating covariance matrices. How should we choose that decay weight is of course never mentioned or discussed!

They tell us when choosing between factors to predict returns, "the real challenge is to winnow down the list of factors to a parsimonious set." Okay, how might I do that you GSAM gods? They never ever tell you [see page 420]

You get the point, just lots of blather and really no content.

Save your money and don't buy this book. They don't need your money they have enough already. And it's not like you are getting knowledge or anything valuable in return.

Summary: Oldschool

Rating: 1
Nicely written from a journalistic perspective but rather old fashioned. Many mistakes and deliberate false claims in order to suit product interests of Goldman Sachs. Examples:

In the chapter on asset liability management there is always an analytical case for equities. However the only reason is that GS does not allow duration as a choice variable. Otherwise beta (in their formula) would become one and the optimal equity allocation is zero. Accidental? I doubt it.

They also claim to have found (earlier) a better method than Stambaugh on dealing with missing data. However either you publish or you shut up.

Waste of time for serious quants

Summary: The definitive equilibrium investing title

Rating: 5
My highest commendations to the asset management team at Goldman Sachs. They have come together and created a highly comprehensive tome that covers all the bases within the realm of modern investment theory. Their solid equilibrium approach is applied to all areas, from traditional investments to alternative asset classes, from institutional funds to private wealth, using analysis and real world applications. Incredibly thorough, extremely recommended.

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