Hi I want to buy some finance books to answer some questions I have in mind. Can you guys help? 1. Which bond is the best bond for me? And what does best mean for bonds? 2. Want to know more about PM. I think I understand the Treynor-Black model but not quite the Litterman-Black model. I heard that these models are not really used by professionals. So how do the pros do PM? 3. Want to learn more about NPV, IRR, EAA. 4. How to minimize WACC? Thanks a lot!
For 1/ and 2/, I would recommend BKM (Bodie, Kane, Marcus - Investments) but they do not cover Litterman-Black. BKM is a MBA level book and, if you do the exercises, will give you an excellent overview of the entire investments universe. I would still suggest you take a look at their book since your understanding seems to be uneven. I do not know of a really good book on protfolio management per se. For 3/ and 4/. Perhaps Brealy Myers. I think the book is called Fundamentals of Corporate Finance. Again, an MBA level book. I think both of these books have watered-down versions - the BKM book is called Essentials of Investments, I think. Use amazon and search by names of authors.
I have the BKM Investments book already. They do cover Litterman-Black in the last chapter but I couldn’t manage to understand it. So I would like to read another book and see if I can understand it. Someone in another forum recommend this one for real world portfolio management. http://www.amazon.com/Risk-Asset-Allocation-Springer-Finance/dp/3540222138 Thanks for your recommendation of the Brealy Myers’ Corp Fin book. I will check it out.
Is “Active Portfolio Management” by Grinold and Kahn the best PM book? http://www.amazon.com/Active-Portfolio-Management-Quantitative-Controlling/dp/0070248826/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1198830961&sr=1-1
Active Portfolio Management is an OK book that encapsulates a lot of great thinking. It proves that the authors are very very smart, but isn’t exactly a great read (unless you were a math major or someone who finds all the equation developing the best path toward understandig… this is not intended as a put-down of people who enjoy that stuff, but just a recognition that most people don’t). David Swenson’s book “Pioneering Portfolio Management” might be better for getting a good conceptual grasp of the different asset classes and how to put them together.
So how do real people do PM? Do they just divide their money by the number of stocks and then adjust the weights in un-rigorous way? Will this Swenson book tell me how real fund managers do PM?
There are a variety of styles to PM. The quantitative style says that if you have accurate statistical analysis of how different assets are correlated and what they return, you can create a portfolio that gives you the maximum expected return for the level of risk you are willing to take. Of course, coming up with accurate statistical descriptions and prognoses is tricky, and figuring out how to combine known factors appropriately is really just an art, disguised by mathematics to look more scientific than it really is (I admire the math, but don’t get fooled into thinking that math makes it scientific). The qualitative style suggests that you can identify trends in business and the economy by putting together information about companies and countries and industries and other sources. Now this can be rigorous too (don’t think that qualitative work is necessarily unrigorous just because there isn’t a formula attached), but the balancing is done in ways that are harder to replicate precisely. Often this means that portfolios are closer to equal weighted. Interestingly, Fabozzi points out in his book on equity modeling that optimized portfolios do not perform substantially better than equally weighted portfolios in most cases, and points out that the problem is that estimation errors in quantitative models tend to degrade their theoretically superior allocations. It boils down to the problem that although you can’t predict what the next period’s return will be, you still need to have an exactly accurate number for the *average* return (and standard deviation and correlations). In reality, you almost never get exact values, but estimates, and this is why equally weighted portfolios are often about as good, despite being theoretically inferior.
"Fabozzi points out in his book on equity modeling that optimized portfolios " Which book is this? I have Swensen’s “Pioneering PM”. Do you have any other PM books that you would recommend? thanx.
Fabozzi: “Financial Modeling of the Equity Market: From CAPM to Cointegration” (he’s probably said it elsewhere, but that’s what I’ve been reading). If you want to do quantitative equity management, I found Ludwig B Chincarini and Daehwan Kim’s “Quantitative Equity Portfolio Management” much more digestible than Active Portfolio Management, although it only covers the equity part of the spectrum. I admit that fixed income strategy is a bit of a mystery for me. I understand the valuation part relatively well, but I’m not sure how FI strategy works. Obviously, you want excess returns, but I am not sure how to translate economic insights into fixed income strategies (moving up and down the yield curve, credit curve, etc.). If anyone has good readings for this, I’d love to know.
I know Fabozzi is an authority in fixed income. Which one of his books is good in particular regarding FI strategy?
Most of these Qs are answered in those CFAI books that everyone on here wont shut up about. ymc Wrote: ------------------------------------------------------- > Hi I want to buy some finance books to answer some > questions I have in mind. Can you guys help? > > 1. Which bond is the best bond for me? And what > does best mean for bonds? > > 2. Want to know more about PM. I think I > understand the Treynor-Black model but not quite > the Litterman-Black model. I heard that these > models are not really used by professionals. So > how do the pros do PM? > > 3. Want to learn more about NPV, IRR, EAA. > > 4. How to minimize WACC? > > Thanks a lot!
Essentials of Investments is correct…I am reading that now
I found Fundamentals of Investments (valuation and Management) useful. The authors are Charles J. corrado and Bradford D. Jordan