An Exceptional Resource for Asset Allocation

He explains them clearly and explains how indexes and

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enhancing my knowledge in an area where it was deficient – commodity-linked securities. He explains them clearly, and explains how indexes and mutual funds of commodity-linked securities work, and why they are different from (and preferable to) managed commodity partnerships. The two worlds of asset allocation I will further highlight the good points of Gibson’s book by means of a stark, but odious comparison. I previously reviewed the book The Endowment Model of Investing , by Martin Leibowitz, Anthony Bova, and P. Brett Hammond. That book is just as much about asset allocation as Gibson’s. It could equally well have been titled Asset Allocation: The Endowment Model of Investing . The parallel ends there. For those who haven’t read my review of the Leibowitz book, I panned it vigorously, and I stand by that review. The following points of comparison between the Leibowitz and Gibson books help show why Gibson’s book is so distinguished. 1. Gibson devotes an entire chapter to a clear explanation of how he arrives at his ex- pected return assumptions. The development of these numbers is imbued with the modesty that is appropriate when making very rough, but reasonable estimates of numbers for which an estimate is required, even if very rough. By contrast, the Leibowitz book provides no explanation whatsoever for its expected return assumptions, merely saying in a footnote that these crucial inputs were “sup- plied by an independent source.” 2. More than halfway through his book (Chapter 10) Gibson includes a chapter on portfolio optimization, or mean-variance optimization. He makes it plain that it is not a crucial chapter. In it, Gibson gives a clear explanation why – though the model is to be respected for the insight it can offer, and the modicum of guidance it can occa- sionally provide for practical decision-making – the mean-variance model does not work for most practical purposes. In fact, Gibson makes little or no use of it in the rest of the book. © Copyright 2010, Advisor Perspectives, Inc. All rights reserved.
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By contrast, while admitting – without explaining it very well – that the mean-vari- ance optimization model must be “tortured” in order for it to work after a fashion, Leibowitz et. al. proceed to run the model overtime to generate virtually all the res- ults in their book. 3. Gibson prefaces one of his chapters with Einstein’s quote, “Everything should be made as simple as possible, but not simpler.” He takes pains to abide by this dictum. For example, in his discussion of the Capital Asset Pricing Model, Gibson feels obliged to use the word “volatility” instead of “risk,” because “volatility” may not accurately represent the full meaning of risk. By contrast, Leibowitz et. al., while taking note of the fact that there may be risks for “alternative asset classes” that are not captured by volatility, proceed to measure risk as volatility all the same, oversimplifying risk by equating it to volatility.
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Christopher Reinemann
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