Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Controlling Risk

-William E. Jacques, Partner and Chief Investment Officer, Martingale Asset Management.

"Active Portfolio Management offers investors an opportunity to better understand the balance between manager skill and portfolio risk. Both fundamental and quantitative investment managers will benefit from studying this updated edition by Grinold and Kahn."

-Scott Stewart, Portfolio Manager, Fidelity Select Equity ® Discipline

Co-Manager, Fidelity Freedom ® Funds.

"This Second edition will not remain on the shelf, but will be continually referenced by both novice and expert. There is a substantial expansion in both depth and breadth on the original. It clearly and concisely explains all aspects of the foundations and the latest thinking in active portfolio management."

-Eric N. Remole, Managing Director, Head of Global Structured Equity, Credit Suisse Asset Management.

Mathematically rigorous and meticulously organized, Active Portfolio Management broke new ground when it first became available to investment managers in 1994. By outlining an innovative process to uncover raw signals of asset returns, develop them into refined forecasts, then use those forecasts to construct portfolios of exceptional return and minimal risk, i.e., portfolios that consistently beat the market, this hallmark book helped thousands of investment managers. Active Portfolio Management, Second Edition, now sets the bar even higher. Like its predecessor, this volume details how to apply economics, econometrics, and operations research to solving practical investment problems, and uncovering superior profit opportunities. It outlines an active management framework that begins with a benchmark portfolio, then defines exceptional returns as they relate to that benchmark. Beyond the comprehensive treatment of the active management process covered previously, this new edition expands to cover asset allocation, long/short investing, information horizons, and other topics relevant today. It revisits a number of discussions from the first edition, shedding new light on some of today's most pressing issues, including risk, dispersion, market impact, and performance analysis, while providing empirical evidence where appropriate. The result is an updated, comprehensive set of strategic concepts and rules of thumb for guiding the process of-and increasing the profits from-active investment management.

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All Customer Reviews
Average Customer Review:
0 of 0 people found the following review helpful:

Not a book for quant people, 2010-02-22
As many other reviewers have indicated, this book is verbose and poorly organized, and clearly not written by people trained in mathematics. It seems pretty clear that the book is also written FOR the idiots, er, I mean, MBAs who manage mutual funds and pension funds. A tell: the authors use the bizarre approximation
ln(1+x) = x (there is nothing bizarre about the approximation, but the use of the logarithm gives much simpler derivations of much more widely applicable results). Since everyone has a calculator with a ln button, and quantitatively inclined people can compute logs pretty quickly in their heads, this is an indication that the book is targeted to mathematically unsophisticated people. Not being one of these, I cannot tell if the book is useful for them. I can say that this is the second finance book I read (the first being an older edition of Hull's Options, Futures & Other Derivatives with Derivagem CD Value Package (includes Student Solutions Manual for Options, Futuresd Other Derivatives) (7th Edition), since my first finance project was developing a market impact model. Everything G&K had to say about market impact was either trivial or wrong, but they did refer to the very important paper of Almgren and Chriss. Read that, and be happier.


0 of 0 people found the following review helpful:

My favorite book on portfolio theory, 2009-08-17

There's three basic categories of quants. Structurers, risk managers and traders. Structurers don't need this book. They should go buy Hull and be happy. Every risk manager and trader in the business needs this book. When I was first introduced to this book, I figured it was more or less only for their money management businessa manual for building Barclays Index Plus funds. That is what Grinold and Kahn do for a living, and they probably wrote the book to have something to give to dumb pupils who don't know anything. The book certainly covers some of the details and models used in money management tasks. However, this book is a lot more than that. They didn't write a book about specific investment instances that come up. They write a book which generalizes well to all fields involving information under uncertainty. They don't talk much about futures or options; this really is about equities, but if you're trading in those other markets, you still need this book.

Yes, you actually do need some calculus and linear algebra to read the book. It's written for people who understand math; it's a book on *quantitative* finance -not "seat of pants" trading. Even if you skip the mathematics (and most of the heavy stuff is kept neatly tucked away in appendices, so as not to frighten the MBAs and small children), you're likely to get something out of it: at least you'll have a vague idea of what the propeller heads in the white laboratory jackets are up to. What I find most remarkable about the book is how it rewards upon rereadings. Got a trading problem? There is probably a section in this book which relates to it. When I'm banging my head on a problem, and getting no joy from the google machine, Grinold and Kahn's book often has something which at least points me to the answer. This is a remarkable quality, as the book really was, as far as I can tell, written to help out with the kinds of tasks they face at BGI.

If you're a former physics nerd, the classic physics book it most resembles for me is the Landau & L. (amazon won't let me say the other guy's name) book on classical mechanics. The clarity and density of G&K's book very much resemble L&L. Like L&L, it can be used as a first text on this sort of thing. You may prefer to get your basics elsewhere; I liked learning mechanics from Goldstein for example, but once I knew my p's and q's, I tossed Goldstein and just read L&L when I needed professional insight. G&K is like this; theirs is the book that you'll keep around as a reference once you have a handle on the basics whether you learn the basics from them or not.

Personally, I would have liked a little more meat on non-parametric statistics, maybe some overarching Bayesian framework and some ideas on backtesting, a la bootstrap resampling, but it would probably change the tenor of the book and reduce its utility for what they do at work. Still, they'll probably read this review, and if they take requests, that's mine.



4 of 5 people found the following review helpful:

Not an easy read, 2009-01-27
This book was recommended to me as the bible of active management. I attempted reading it several times, but gave up everytime. Coming from a science and engineering background, I find the exposition very verbose, yet lacking a ground-up derive-from-fundamentals approach. Even in the description of CAPM, I cannot tell the assumptions from the conclusions of the theory. The book is not an easy read, but I don't think that's because the subject is inherently hard.


0 of 1 people found the following review helpful:

Another must-have, 2009-01-11
This is truly the bible of active quantitative portfolio management. Its only true weakness is its lengthyness and the rather naive analysis of the CAPM.


2 of 4 people found the following review helpful:

Good, 2008-08-08
I read this books about a year aand a half go, and thought at the time it introduced some really good techniques for manaaging a portfolio. One would need a linear algebra and statictical background to fully unserstand it, and access to some expensive software and data bases to implement it.

However, I now think the techniques depend on reasonably stable fincial markets, and after the emerginging crises starting in the summer of 2007, I have decided not to prusue this farther.

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