Portfolio Analytics: An Introduction to Return and Risk Measurement (Springer Texts in Business and Economics)

This textbook first introduces the reader to return measurement and then goes on to compare the time-weighted rate of return (TWR) with the money-weighted rate of return (MWR). To emphasize the importance of risk in conjunction with return, different tracking errors are analyzed and ex-post versus ex-ante risk figures are compared. The author then proceeds to modern portfolio theory (MPT) and illustrates how the constraints interfere substantially in the construction of optimized portfolios. As a conclusion, the book provides the reader with all the essential aspects of investment controlling. Preface 6 Preface to the Second Edition 8 Conventions 10 Acknowledgments 12 Contents 14 Chapter 1: Introduction 16 Chapter 2: Return Analysis 20 2.1 Interest Rate, Return and Compounding 20 2.2 Return Contribution and Attribution 25 2.2.1 The Arithmetic Attribution 34 2.2.2 The Geometrical Attribution 40 2.2.3 Currency Attribution Basics 44 2.3 Time-Weighted Rate of Return 47 2.3.1 Measuring Absolute Return 47 2.3.2 Measuring Relative Return 54 2.4 Money-Weighted Rate of Return 63 2.4.1 First Properties of the Internal Rate of Return Equation 63 2.4.2 Approximating the Solution of the IRR Equation Near Zero 69 2.4.3 The Solution of the IRR and Bond Portfolios 77 2.5 TWR Attribution Versus MWR Attribution 83 2.5.1 Absolute Decomposition of the MWR 83 2.5.2 A First Discussion of the Difference Between the MWR and TWR 92 2.5.3 Relative Decomposition of the IRR 93 Chapter 3: Risk Measurement 103 3.1 Absolute Risk 105 3.1.1 The Risk of a Portfolio 105 3.1.2 Value at Risk 109 3.1.2.1 Historical VaR 111 3.1.2.2 Parametric VaR 111 3.1.2.3 Monte Carlo Simulation 112 3.2 Relative Risk 112 3.2.1 The Relative Risk of Two Portfolios 112 3.2.2 The Tracking Error 116 3.3 Risk Decomposition at the Segment Level 122 3.4 Risk Decomposition with Factor Analysis 136 3.4.1 Introduction 136 3.4.2 Cross-Sectional Model (Regression Over Securities) 137 3.4.3 Time Series Model (Regression Over Time) 139 3.4.4 The Principal Component Analysis 140 3.5 Probability Concepts 146 Chapter 4: Performance Measurement 154 4.1 Investment Process and Portfolio Construction 154 4.1.1 Active Investment Strategy 156 4.1.1.1 Fundamental Research 156 Introduction and Terminology 156 Evaluating a Stock: Some First Approaches 157 4.1.1.2 Technical Research 158 Introduction and Terminology 158 Description of Some Important Concepts 158 4.1.1.3 Economic Research 160 4.1.1.4 Political Research 162 4.1.1.5 Quantitative Research 163 4.1.2 Passive Investment Strategy 164 4.2 Portfolio Optimization 164 4.3 Absolute Risk-Adjusted Measures 178 4.4 The Capital Asset Pricing Model 180 4.5 Relative Risk-Adjusted Measures 188 Chapter 5: Investment Controlling 194 5.1 Objectives and Activities 194 5.2 Quantitative Building Blocks 197 5.2.1 Performance Measurement 197 5.2.2 Performance Administration 198 5.2.3 Performance Reporting 198 5.2.4 Portfolio Analysis 201 5.3 Qualitative Building Blocks 205 5.3.1 Performance Watch List 205 5.3.2 Portfolio Analytics 206 5.3.3 Performance Review 206 5.4 Example of a Performance Review 207 5.5 Review and Concluding Remarks 208 References 212 About the Author 214 Index 215 Front Matter....Pages i-xiv Introduction....Pages 1-4 Return Analysis....Pages 5-87 Risk Measurement....Pages 89-139 Performance Measurement....Pages 141-180 Investment Controlling....Pages 181-198 Back Matter....Pages 199-204