Dynamic Portfolio Theory and Management

by Richard Oberuc

The First Asset Allocation Model to Accurately Take Into Account—and Adapt to—Changing Market Conditions Modern Portfolio Theory (MPT) and asset allocation are the foundations upon which institutional investors account for the impact of changes in risk on changes in expected return. But legitimate questions remain over methods currently used to determine the inputs required to drive the model. How can professional investors trust the results obtained when they are often uncertain over the input numbers used to arrive at those results? Until now, they could not. Dynamic Portfolio Theory & Management introduces an all-new model that, unlike the static nature of MPT, adapts to changing market conditions as they occur. This breakthrough Provides a procedure to evaluate which factors truly influence the performance of most major asset classes Allows investors to modify allocations based on changing economic conditions and factors Dramatically increases accuracy by optimizing multiple past time periods into a single future time period In today's complex investing arena, investors must account for multiple time periods when periodically reallocating their portfolios. Dynamic Portfolio Theory and Management provides a time-adaptive asset allocation model that, for the first time, provides that flexibility. It explains in straightforward and practical language how investors can implement and apply a dynamic asset allocation procedure—in an increasingly uncertain marketplace. "Either you believe that markets move because certain causative factors make them move or you don't. If you do not believe this, you will suffer whatever performance your buy-and-hold portfolio metes out. If you do believe in such dynamic causes, then you have a chance of reacting to changes in these underlying factors or not reacting. "The basic benefit from patient application of the principles and procedures detailed in this book is to shift the investment odds in your favor." —From the Preface When he first introduced Modern Portfolio Theory a half century ago, Nobel Prize Laureate Harry Markowitz helped to quantify and provide formal structure to investment planning and projection And while a number of techniques have been introduced over the years to complement MPT and aid investors in creating rational portfolios of multiple investments, none has solved the fundamental question of how an investor or portfolio manager can accurately determine expected returns, standard deviations, correlation matrices, and other required inputs. Dynamic Portfolio Theory and Management takes a dramatic step forward in resolving these issues by introducing DynaPorte, a fundamental and dynamic framework that uses macroeconomic and market-related factors to revise and update asset allocations. This framework allows the use of an indefinite number of discreet historical time periods to optimize the model fit. Representing a true quantum leap in portfolio theory to confidently control the future performance of a diversified portfolio, the book's Links asset allocations directly to the value of macroeconomic factors without the need to calculate the expected performance of the investments Focuses on the size and frequency of losing months, as opposed to the volatility of all return months Improves upon standard deviation by addressing the effect of skewness in investment performance return While MPT eliminates one seemingly complex problem, it in many ways introduces a less difficult yet just as maddening How can investors accurately determine the inputs necessary to gauge the tradeoff of changes in risk with changes in expected return? Dynamic Portfolio Theory and Management introduces a revolutionary model and framework designed to instantly increase both your accuracy and versatility in controlling portfolios of investments from stocks, bonds, and interest rates to real estate and even hedge funds—by linking asset allocation directly to the values of macroeconomic factors instead of inexact and error-prone calculations of expected performance. Richard Oberuc is founder and owner of Burlington Hall Asset Management and chair of the Foundation for Managed Derivatives Research, whose sponsors include Morgan Stanley, Goldman Sachs, John W. Henry & Company, Merrill Lynch, and other leading Wall Street firms. A veteran of more than 25 years in the financial industry, Oberuc has devoted considerable time and attention to developing innovative supply/demand models and hedging methodologies.

Genres: Finance

336 pages, Paperback

First published September 19, 2003