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Contents 1. Static Portfolio Theory The Markowitz Mean-Variance Model Basic Assumptions of the Markowitz Mean-Variance Model Perceived Difficulties with the Mean-Variance Model Other Static Asset Allocation Approaches Summary 2. Arbitrage Pricing Theory Description of the APT XE "APT" "See Arbitrage pricing theory" Model Factor Analysis Approach Fundamental Macroeconomic Factor Approach Parameter Estimation Methodologies Time-Varying Risk Premiums Problems with Parameter Estimation Must Risk Premia / Expected Returns be Determined? Missing Final Step to Asset Allocation 3. Factors Influencing Stock Returns Searching for a Fundamental Approach Factors Investigated for an Equity Return Model Dividend Yields Industrial Production Interest Rate Term Spread Default Spread Inflation Exchange Rates GNP or GDP Trade or Trade Balance Money Supply Unemployment Equity Returns Reversion to the Mean January Effect Other Factors Found to be Significant Other Considerations Annual Return Factor Model for Stocks Monthly Return Factor Model for Stocks 4. Factors Influencing Bond Returns A Fundamental Approach Factors Investigated for a Bond Return Model Term Spread Default Spread Interest Rates Inflation Dividend Yield Bond Returns or Bond Yield Reversion to the Mean Equity Returns Reversion to the Mean Other Factors Found to be Significant Annual Return Factor Model for Bonds Monthly Return Factor Model for Bonds 5. Factors Influencing Interest Rates Fundamental Approaches Factors Investigated for an Interest Rate Return Model Actual Inflation Expected Inflation Actual Output Gap Expected Output Gap Previous Federal Funds Rate Money Supply Unemployment Level Unemployment Change Other Factors Investigated Monthly Return Factor Model for Interest Rates 6. Factors Influencing Hedge Fund Returns Hedge Fund Categories Selected Searching for a Fundamental Approach Factors Investigated for Hedge Fund Return Models Stock Market Return Index Bond Market Return Index Small Minus Big Stock Capitalization High Minus Low Value Stocks Up-Minus-Down or Return Momentum Default Spread Commodity Index Currency Index Stock Options or Stock Return Volatility Summary of Factors Influencing Hedge Funds Monthly Return Factor Model for Hedge Fund Categories 7. Predictability of Market Returns Measures of Predictability Difficulties Leading to Poor Predictability Reports of Good Predictability Reports of Poor Predictability Predictability Versus Profitability What Can be Done to Increase Predictability? 8. Market Timing Methods and Results Market Timing versus Dynamic Asset Allocation Maximum Possible Gain from Market Timing Market-Timing Model Performance Market-Timing Money Manager Performance Review 9. Multi-Period Portfolio Theory Multi-Period Models with Predictable Returns Risk Measures Merton (1969, 1971, 1973) Brennan, Schwartz and Lagnado (1997) Brandt(1999) Barberis (2000) Lynch and Balduzzi (2000) Aït-Sahalia and Brandt (2001) Campbell, Chan and Viceira (2003) Brandt, Goyal and Santa-Clara (2001) Klemkosky and Bharati (1995) The Effect of Uncertainty in the Predictive Relationships 10. DynaPorte Model Description Model Objectives DynaPorte Model Formulation DynaPorte Advantages DynaPorte Shortcomings Perspective 11. DynaPorte Model Examples U.S. Stocks and T-Bill Model Stocks, Bonds and T-Bill Model Two Stocks, Two Bonds and T-Bill Model Four Stock Sectors, Government Bonds and Cash Model Stocks, Bonds and Five Hedge Fund Categories Review of the DynaPorte Dynamic Model Performance 12. Mean Absolute Deviation Advantages/Disadvantages of Least Squares Advantages/Disadvantages of Mean Absolute Deviation Do MAD and LS Obtain Similar Model Coefficients? Does MAD Produce Better Forecasts than Least Squares? Should we Prefer MAD to LS? Author Index Subject Index
Library of Congress Subject Headings for this publication: Portfolio management, Investment analysis