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Portfolio Theory and Performance Analysis


Asset management has become central to the development of the financial industry, both in the United States and Europe. The increasing number of cross-border merger and acquisition operations and the extremely high valuations that are put on those operations are evidence of the major financial establishments’ desire to invest in a sector that they consider to be essential to their strategy of globalising and "financialising" their activities.

Asset management's transition from an "art and craft" to an industry has inevitably called integrated business models into question, favouring specialisation strategies based on cost optimisation and learning curve objectives.

Faced with an abundance of tools and academic references, it is important to place all the practices, empirical studies and innovations in their context, given that they are always described as "major" by their promoters in the area of portfolio theory.

Portfolio Theory and Performance Analysis

  • allow the professionals, whether managers or investors, to take a step back and c learly separate true innovations from mere improvements to well-known, existing techniques;
  • puts into context the importance of innovations with regard to the fundamental portfolio management questions, which are the evolution of the investment management process, risk analysis and performance measurement;
  • takes the explicit or implicit assumptions contained in the promoted tools into account and, by so doing, evaluate the inherent interpretative or practical limits.

This book connects each of the major categories of techniques and practices to the unifying and seminal conceptual developments of modern portfolio theory, whether these involve measuring the return on a portfolio, analysing portfolio risk or evaluating the quality of the portfolio management process.

Noel Amenc is professor of finance at the Edhec Business School, where he is in charge of the Risk and Asset Management research centre.  Noel is also associate editor of the Journal of Alternative Investments. He is the author of numerous publications in the domain of portfolio management, notably in the areas of asset allocation and performance measurement.  He also holds significant positions within the asset management industry, including head of research with Misys Asset Management Systems.

Veronique Le Sourd  holds an advanced graduate diploma in applied mathematics from the Université Pierre and Marie Curie (Paris VI) and has worked as a research assistant within the finance and economics departments of HEC Business School.  She is currently a research engineer for Misys Asset Management Systems and associate researcher with the Edhec Risk and Asset Management Research Centre.




1. Presentation of the Portfolio Management Environment.

1.1 The different categories of assets.

1.2 Definition of portfolio management.

1.3 Organisation of portfolio management and description of the investment management process.

1.4 Performance analysis and market efficiency.

1.5 Performance analysis and the AIMR standards.

1.6 International investment: additional elements to be taken into account.

1.7 Conclusion.

2. The Basic Performance Analysis Concepts.

2.1 Return calculation.

2.2 Calculating relative return.

2.3 Definition of risk.

2.4 Estimation of parameters.

2.5 Conclusion.

3. The Basic Elements of Modern Portfolio Theory.

3.1 Principles.

3.2 The Markowitz model.

3.3 Efficient frontier calculation algorithm.

3.4 Simplified portfolio modelling methods.

3.5 Conclusion .

4. The Capital Asset Pricing Model and its Application to Performance Measurement.

4.1 The CAPM.

4.2 Applying the CAPM to performance measurement: single-index performance measurement indicators.

4.3 Evaluating the management strategy with the help of models derived from the CAPM: timing analysis.

4.4 Measuring the performance of internationally diversified portfolios: extensions to the CAPM.

4.5 The limitations of the CAPM.

5. Developments in the Field of Performance Measurement.

5.1 Heteroskedastic models.

5.2 Performance measurement method using a conditional beta.

5.3 Performance analysis methods that are not dependent on the market model .

5.4 Conclusion.

6. Multi-factor Models and their Application to Performance Measurement.

6.1 Presentation of the multi-factor models.

6.2 Choosing the factors and estimating the model parameters.

6.3 Extending the models to the international arena.

6.4 Applying multi-factor models.

6.5 Summary and conclusion.

7. Evaluating the Investment Management Process and Decomposing Performance.

7.1 The steps in constructing a portfolio.

7.2 Performance decomposition and analysis.

8. Fixed Income Security Investment.

8.1 Modelling yield curves: the term structure of interest rates.

8.2 Managing  bond portfolio.

8.3 Performance analysis for fixed income security investment.