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Foreword xi <p>Introduction xxiii</p> <p>A Note on Expected Return and Geometric Mean xxv</p> <p>Acknowledgments xxxi</p> <p><b>PART ONE</b> <b>Equities</b></p> <p>CHAPTER 1 Purity of Purpose: How Style-Pure Indexes Provide Useful Insights 7</p> <p>CHAPTER 2 Investing in Europe with Style: Why Investors in Europe Would Benefit From Constructing Portfolios Through the Prism of Style 15</p> <p>CHAPTER 3 Why Fundamental Indexation Might—or Might Not—Work 21</p> <p>CHAPTER 4 The Fundamental Debate: Two Experts Square Off on the Big Issues Surrounding Fundamentally Weighted Indexes 39</p> <p>CHAPTER 5 Collared Weighting: A Hybrid Approach to Indexing 51</p> <p>CHAPTER 6 Yield to Investors? A Practical Approach to Building Dividend Indexes 63</p> <p>CHAPTER 7 Holdings-Based and Returns-Based Style Models 71</p> <p>CHAPTER 8 Estimates of Small Stock Betas Are Much Too Low 103</p> <p>CHAPTER 9 A Macroeconomic Model of the Equity Risk Premium 117</p> <p><b>PART TWO</b> <b>Fixed Income, Real Estate, and Alternatives</b></p> <p>CHAPTER 10 Good and Bad Monetary Economics, and Why Investors Need to Know the Difference 133</p> <p>CHAPTER 11 Inflation, Gilt Yields, and Economic Policy 143</p> <p>CHAPTER 12 Reverse Mean-Variance Optimization for Real Estate Asset-Allocation Parameters 147</p> <p>CHAPTER 13 The Long and Short of Commodity Indexes 157</p> <p>CHAPTER 14 Less Alpha and More Beta Than Meets the Eye 175</p> <p>CHAPTER 15 Venture Capital and its Role in Strategic Asset Allocation 179</p> <p><b>PART THREE</b> <b>Crashes and Fat Tails</b></p> <p>CHAPTER 16 One-and-a-Quarter Centuries of Stock Market Drawdowns 193</p> <p>CHAPTER 17 Stock Market Bubbles and Crashes: A Global Historical and Economic Perspective 199</p> <p>CHAPTER 18 De´ ja` Vu All Over Again 211</p> <p>CHAPTER 19 De´ ja` Vu Around the World 223</p> <p>CHAPTER 20 Getting a Read on Risk: A Discussion with Roger Ibbotson, George Cooper, and Benoˆıt Mandelbrot on the Crisis and Risk Models 239</p> <p><b>PART FOUR</b> <b>Doing Asset Allocation</b></p> <p>CHAPTER 21 Does Asset-Allocation Policy Explain 40 Percent, 90 Percent, or 100 Percent of Performance? 253</p> <p>CHAPTER 22 Asset-Allocation Models Using the Markowitz Approach 267</p> <p>CHAPTER 23 Asset Allocation with Annuities for Retirement Income Management 275</p> <p>CHAPTER 24 MPT Put Through the Wringer: A Debate Between Steven Fox and Michael Falk 303</p> <p>CHAPTER 25 Updating Monte Carlo Simulation for the Twenty-First Century 311</p> <p>CHAPTER 26 Markowitz 2.0 325</p> <p>CHAPTER 27 What Does Harry Markowitz Think? A Discussion with Harry Markowitz and Sam Savage 351</p> <p>Afterword 367</p> <p>About the Author 375</p> <p>Index 377</p>

<p><b>PAUL D. KAPLAN</b> is quantitative research director at Morningstar Europe and is responsible for the quantitative methodologies behind Morningstar's fund analysis, indexes, advisor tools, and other services. Dr. Kaplan conducts research on investment style analysis, performance and risk measurement, asset allocation, retirement-income planning, portfolio construction, index methodologies, and alternative investments. He led the development of quantitative methodologies behind the Morningstar Rating for funds (Morningstar's star rating), the Morningstar Style Box, and the Morningstar family of indexes. Many of Dr. Kaplan's research papers have been published in professional books and publications such as the <i>Financial Analysts Journal</i>, the <i>Journal of Portfolio Management</i>, the <i>Journal of Wealth Management</i>, the <i>Journal of Investing</i>, the <i>Journal of Performance Measurement</i>, the <i>Journal of Indexes</i>, and the <i>Handbook of Equity Style Management</i>. He received the 2008 Graham and Dodd Award and won a Graham and Dodd Award of Excellence in 2000.

<p>In 1952, the economist Harry Markowitz introduced a now-commonplace concept: investors can construct an "efficient portfolio" by investing in diverse securities combined to maximize expected returns while minimizing expected volatility. Markowitz revolutionized investing. Ever since, the idea of asset allocation has been the bedrock of constructing portfolios. The pursuit of finding a portfolio's sweet spot—the optimal area where various asset classes work in conjunction to provide the most returns for the least risk—has given rise to an incredible body of research and range of products. <p>Paul D. Kaplan has been right in the middle of these developments. First as a researcher for Ibbotson Associates and now for Morningstar, Dr. Kaplan has published dozens of articles and research papers over the past fifteen years that dig deeply into analyzing the moving parts of portfolio creation. In addition to pushing the asset-allocation debate forward with his research, Dr. Kaplan has helped develop products and tools for institutions, financial advisors, and individual investors that have made it practical to put the concepts of asset allocation into everyday use. <p>In <i>Frontiers of Modern Asset Allocation,</i> Dr. Kaplan brings together twenty-seven of his best articles and interviews. He divides the book into four parts—Equities; Fixed Income, Real Estate, and Alternatives; Crashes and Fat Tails; and Doing Asset Allocation—examining everything from how asset classes should be defined to whether they should be represented by market value–weighted indexes or other principles. The book also includes interviews with industry luminaries who have greatly influenced the evolution of asset allocation, including Markowitz, Roger Ibbotson, and the late Benoît Mandelbrot. <i>Frontiers of Modern Asset Allocation</i> is essential reading for institutional investors, wealth managers, financial planners, and academics. It includes three appendices that put theory into action with technical details for new asset-allocation frameworks, including the next generation of portfolio construction tools, which Dr. Kaplan dubs "Markowitz 2.0," in honor of the father of Modern Portfolio Theory.

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