Active Management

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Active Portfolio Management

A Quantitative Approach for Providing Superior Returns and Controlling Risk

Richard C. Grinold Ronald N. Kahn SECOND EDITION

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CONTENTS

Preface Acknowledgments Chapter 1 Introduction Part One Foundations Chapter 2 Consensus Expected Returns: The Capital Asset Pricing Model Chapter 3 Risk Chapter 4 Exceptional Return, Benchmarks, and Value Added Chapter 5 Residual Risk and Return: The Information Ratio Chapter 6 The Fundamental Law of Active Management Part Two Expected Returns and Valuation Chapter 7 Expected Returns and the Arbitrage Pricing Theory 173 11 xi xv 1

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Chapter 8 Valuation in Theory Chapter 9 Valuation in Practice Part Three Information Processing Chapter 10 Forecasting Basics Chapter 11 Advanced Forecasting Chapter 12 Information Analysis Chapter 13 The Information Horizon Part Four Implementation Chapter 14 Portfolio Construction Chapter 15 Long/Short Investing Chapter 16 Transactions Costs, Turnover, and Trading Chapter 17 Performance Analysis

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Chapter 18 Asset Allocation Chapter 19 Benchmark Timing Chapter 20 The Historical Record for Active Management Chapter 21 Open Questions Chapter 22 Summary Appendix A Standard Notation Appendix B Glossary Appendix C Return and Statistics Basics Index

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PREFACE

Why a second edition? Why take time from busy lives? Why devote the energy to improving an existing text rather than writing an entirely new one? Why toy with success? The short answer is: our readers. We have been extremely gratified by Active Portfolio Management's reception in the investment community. The book seems to be on the shelf of every practicing or aspiring quantitatively oriented investment manager, and the shelves of many fundamental portfolio managers as well. But while our readers...