Year: 2003
Type: book
Abstract: The recent confluence of low interest rates and substandard capital market performance has strained institutions that manage assets for the purpose of funding liabilities, namely, pension funds, endowment funds, and charitable foundations.Individuals as well have found the recent investment climate especially challenging as they strive to meet ongoing financial obligations while accumulating sufficient capital to ensure a comfortable retirement.These trying times have led many financial analysts to question several timehonored beliefs, including the reliability of the equity risk premium and the suitability of policy portfolios.William Ziemba's excellent monograph is, therefore, a timely and welcome contribution to the literature on asset, liability, and wealth management.Ziemba begins with a concise and accessible explication of mean-variance analysis, utility maximization, and capital asset pricing.This chapter provides the theoretical foundation for the standard tools used by most financial analysts to form portfolios.The remainder of the monograph departs from the static world of mean-variance analysis and introduces us to the dynamic world of stochastic programming.Ziemba motivates this transition to dynamic programming by first demonstrating that the real world is far different from the theoretical world of mean-variance analysis.For example, he recounts many of the extreme events that have recently plagued the capital markets as evidence that return distributions tend not toward normality but rather toward fat tails.He also shows that correlations seem to be scenario dependent; hence, they offer less diversification during stressful markets than typically assumed.In addition, he discusses certain time-series dynamics of returns, such as mean reversion, as well as certain time-series dynamics of volatility, such as clustering.He then introduces stochastic programming and shows why it is more suitable than static approaches for tackling these real-world complexities.In the next few chapters, Ziemba presents applications of stochastic programming models for various types of investors, including insurance companies, pension funds, individuals, and hedge funds.These applications illustrate the benefits of stochastic programming in addressing such important but often neglected investment considerations as human capital in the case of pension funds and taxes in the case of individual investors.Although some readers may find parts of the material mathematically daunting, Ziemba has a knack for distilling the essential insights into straightforward rules of thumb, as evidenced by his closing list of 10 points to remember.Feel free to skip the math if is not to your taste, but I encourage The Stochastic Programming Approach to Asset, Liability, and Wealth Management xii ©2003, The Research Foundation of AIMR™ you to pay close attention to the essential insights of this important monograph.The complexities of the real world demand a new set of tools, many of which are contained herein.The Research Foundation is especially pleased to present The Stochastic Programming Approach to Asset, Liability, and Wealth Management.
Language: English
Field: Decision Sciences
Domain: Social Sciences
Open Access status: gold
OpenAlex ID: W2160259202