Portfolio Construction and Risk Budgeting
First published:
ISBN: 9781782721000
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Valuation of Asset Management Firms
Introduction
A Primer on Portfolio Theory
Application in Mean–Variance Investing
Diversification
Frictional Costs of Diversification
Risk Parity
Incorporating Deviations from Normality: Lower Partial Moments
Portfolio Resampling and Estimation Error
Robust Portfolio Optimisation and Estimation Error
Bayesian Analysis and Portfolio Choice
Testing Portfolio Construction Methodologies Out-of-Sample
Portfolio Construction with Transaction Costs
Portfolio Optimisation with Options: From the Static Replication of CPPI Strategies to a More General Framework
Scenario Optimisation
Core–Satellite Investing: Budgeting Active Manager Risk
Benchmark-Relative Optimisation
Removing Long-Only Constraints: 120/20 Investing
Performance-Based Fees, Incentives and Dynamic Tracking Error Choice
Long-Term Portfolio Choice
Risk Management for Asset-Management Companies
Valuation of Asset Management Firms
Tail Risk Hedging
Asset management firms attract investor’s interest in times of recovering markets as they are seen as ideal recovery plays (due to their aggressive stock market beta). Rising markets will increase assets under management both indirectly (larger inflows as a function of larger wealth and lower risk aversion) and directly (performance related increase in assets under management). Another often quoted reason for the interest in asset management firms is the expectation by many market observers that the asset management industry is ripe for consolidation. Cost synergies are obvious, but diseconomies of scale are not. How do these thoughts enter the rational valuation of asset management firms?
20.1 ECONOMICS OF ASSET MANAGEMENT: PERFORMANCE AND CAPITAL FORMATION
As a first approximation, the asset management industry is hugely profitable, simply because of a rightward shift of the demand function for asset management services.11See Cochrane (2013) for a discussion on the size of finance as an economic sector. However, academic research in the 21st century has accumulated puzzling (seemingly contradictory) evidence that does not yet seem to be reconciled.
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There is a vast amount
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