Markowitz-Harry

This is a reprint of the text that first considered risk along with return in portfolio management! Nobel-prize winner Harry Markowitz explains the theory upon which modern portfolio theory is based in minimal mathematical terms. Of course there has been much subsequent academic research in portfolio theory (much of which is contained in an included bibliography up to 1970), but this book is an outstanding starting point for anyone interested in the efficient management of financial portfolios

While Markowitz is a name well-known in economics (joint winner of the Nobel Proze in 1990) and the investment industry, it is known hardly at all among the public. Perhaps this is the inevitable fate of a man well ahead of his time: Markowitz's work on the relationship of risk and return is truly one of the staggering intellectual achievements of modern economics, and has a great practical impact on people's economic welfare. This volume recapitulates his argument that risk is what drives return, rather than being (as was thought by earlier generations of money managers) merely an unfortunate by-product of the search for higher returns, that the portfolio dominates its constituent assets, and that the way to minimise risk for a given level of expected return is to minimise the covariance of returns of the assets within that portfolio using a quadratic programming algorithm. This is brilliant, seminal stuff, written with a liveliness usually lacking in economic texts.

This is basically a textbook at textbook's price, useful for reference only. Too theoretical and technical to be practical. One wonders how one can apply anything written in it, other than feeling impressed by the book's size and the editors' learning. Read it for pleasure if you dare! Many chapters written by Fabozzi, but very few actually by Markowitz. I feel good having a book edited by a Nobel prizewinner sitting on my shelf among my other investment books (and I have many) but that's about all I can say about it.

Ideal for students doing courses on Investment Management. Very clearly written and explained. Good index. Plenty of references to other writings in the field.

Jacobs and Levy have assembled a body of work here centering on their stock picking techniques as well as their long-short portfolio construction techniques. Most of the chapters have their origins in various finance journals, though the articles themselves are not very heavy on mathematics. Overall, the book was interesting, though somewhat repititious. In retrospect I'd suggest that those familiar with long-short portfolios and the various market anomolies should just read chapter 2 about "Disentangling Equity Return Regularities" since that is where Jacobs & Levy's original work is outlined.

Chapter 2 focuses on the use of regression analysis to "disentangle" various stock market anomalies. The authors claim that simple rules such as "Buy low-P/E stocks" are appealing, but oversimplify the true source of stock returns. For example, low P/E stocks tend to have higher rates of return, as do small-capitalization stocks. But if a small capitalization stocks also tend to have low P/E's, then how much of their return is due to the low-P/E effect by itself, and how much is due to the small-capitalization effect by itself? Jacobs & Levy have done the analyses, and show which effects are genuine, and which effects are merely proxies for other effects. The effects that turn out to be the strongest when "disentangled" include low P/E, Earnings trend, Earnings Surprise, Residual Reversal, and Relative Strength.

The introductory chapters in the book make some interesting points. They argue that the stock market is not random, but then again it is also not simple. Although simple rules are appealing to humans, they oversimplify the complexity of the market. To gain an edge, one must use sophisticated, objective, multi-factor statistical computer models that capture the complex interactions in the market. Of course the authors are saying this to advocate the techniques they use, but nevertheless, they have some good points.

Finally, the second half of the book focuses on the construction of long-short portfolios, though there is not much fresh material here. They point out some of the logistical details of running a long-short portfolio, and give some examples. Also, they introduce the concept of "alpha-transport." That is, one can construct a long-short market neutral portfolio, then by buying buy an index (using SP500 futures, for example) one "transports" the gains from the long-short portfolio onto the gains/losses of the index position. Thus, if the stock picking for the long-short portfolio is done correctly, the total portfolio will beat the index picked. To me, this seemed like an obvious technique; I'm surprised they decided to focus on it and give it a fancy name ("alpha transport")

Overall, I found the book interesting, though somewhat repetitious. I was familiar with much of what was covered, however I did find that Chapter 2 was worth reading, since I wasn't familiar with Jacobs & Levy's work in detail.

As a critic once said of Henry James, Jacobs and Levy have chewed more than they bit off. There is (as another reviewer points out) no follow-up on how their factors have behaved in the decade or more since they did some of the pioneering work on factor models. Overall, the book has about 10% as much information useful to a practitioner as appears in Grinold & Kahn's authoritative text.

This book is great for people who want an overview of the opportunities available in numerical evaluation of stocks. However to say that this is a book on quantitative techniques is probably not the mest description. There is extensive use of regression analysis but more hard-core 'quant' people will probabliy be disappointed. It is clear that the book is written by investment professionals focusing a lot on traditional evaluations parameters such as P/E, P/B etc. Interesting points include purification of return signals, and an extensive discussion of long-short techniques.

This book is primarily about the role of portfolio insurance in the market crash of 1987. Despite the Amazon listing, I don't believe that Harry Markowitz is a co-author. Unfortunately, unless a reader is already well informed about the crash, he will not realize that there are many factual misrepresentations, particularly those that have to do with Jacob's critique of the way portfolio insurance was marketed. I was an eyewitness at the time, so I know what actually happened. Jacobs also has a bad habit of using cited quotes or cited paraphasing, which gives the book an air of scholarly authority, that he then improperly interprets out of context. Jacobs clearly has some reason for his own vendeta and crusade against portfolio insurance that causes him to seriously overstate the case against it and even to attempt to unfairly damage the reputations of those involved.

This is a badly written, repetitive and self-serving account, largely, of the foolishness of "portflio insurance." That things which are "just like" something else may not be so in reality, and that magic fixes in the market (which after all fly in the face of the rational-expectations/efficient-market hypotheses which often are built into the view of the market being relied on) I guess needs to be pointed out regularly, since hope of quick, uninformed, and painless fixes seem to reoccur with each new wave of financial charlatans and the greed they feed on. Jacobs does point out such problems for a particular, rather bizarre episode, and suggests, not too coherently, that such "scams" are still prevalent. However, He does this in a horribly repetitive and self-laudatory way that is not really very clearly argued.

he book provides an extremely enlightening treatment of arcane financial strategies that have derived from Nobel Laureate winning option pricing theory. It is a well-written description of how very smart people are able to "outwit" other supposed very smart people by promising something for nothing. There will always be those who will dream up complicated strategies that purport to promise high return for low risk and thus demand a premium for providing their strategy. The book reminded me of Albert Einstein's work for the Swiss Patent Office at the turn of the century. He would daily receive applications for new and different perpetual motion ideas. Sometimes the ideas were so complicated Einstein could not readily find their flaw. (Finally, he encouraged the patent office to pass a ruling stating that anyone wishing to patent something which broke the second law of thermodynamics had to submit an actual working unit.)

Portfolio insurance was the first large scale application of option pricing theory. Long-Term Capital Management, a highly leveraged hedge fund partnered by the Nobelists, was the second large scale application. Both promised free lunches. It is easy for the disciplined, long-term, individual investor to look at the 1987 crash and the LTCM debacle and conclude that it doesn't matter. The ones who were harmed the most were the purveyors of these supposed perpetual motion machines as well as the investors who "played with this fire". In fact, however, Jacobs' book is a wake-up call that these new financial strategies have become so far reaching, that they can have significant impact not only on the financial markets, but on the global economy as well. The missing element in the book is a way for regulators to rein in an industry that is out of control and return it to its basic purpose: moving money from people that have it (investors) to people that need it and educating the investor on the risk/reward tradeoffs. The industry subrole of shifting risk from people who cannot accept it (e.g. farmers) to those who can (speculators) is also valid, however, it has become so pervasive and sophisticated that it begs for a return to sanity. Absent that, Jacobs' book is an eye-opener, and a must read for anyone hoping to cope with today's complicated markets.