…Approaches to Asset Allocation:

Investment research and technology have evolved dramatically over the past six decades since Modern Portfolio Theory was invented, yet many investment professionals have been using the same asset allocation models during that time period. In his new book released today, Frontiers of Modern Asset Allocation, Paul D. Kaplan, director of quantitative research for Morningstar Europe, seeks to update investors’ approach by exploring the latest techniques in portfolio optimisation and asset allocation.

For more than 20 years, Paul Kaplan has been tackling some of the thorniest issues faced by professional investors. Frontiers of Modern Asset Allocation, a collection of Kaplan’s articles, presents methods for implementing Modern Portfolio Theory with asset classes such as emerging market equities, venture capital, and real estate. Most notably, the book also presents an updated approach to Modern Portfolio Theory, which can consider measures of risk and reward beyond the commonly used metrics of standard deviation and expected return. One such measure is Conditional Value at Risk (CVaR), which better captures investors’ concerns about investment loss.

Kaplan also presents approaches to Modern Portfolio Theory that can take into account the possibility of extreme market outcomes, both good and bad, known as “fat-tailed” distributions. This framework is now available in Morningstar Direct^TM, the company’s web-based global investment analysis platform for institutional investors. In addition, the book includes Kaplan’s contributions to the debate about fundamental indexation, for which he was awarded the Graham and Dodd Award in 2008.

Paul Kaplan comments: “Technology has changed, but the asset allocation models used by most investment professionals have not. New technology allows us to do so much more with probability forecasting and optimisation, so we need to re-think our reliance on 60-year-old asset allocation models.”

Frontiers of Modern Asset Allocation also includes Kaplan’s discussions and debates with industry experts including Roger Ibbotson, Ph.D., founder of Ibbotson Associates, professor of finance at Yale School of Management, and partner at Zebra Capital Management; the late Benoît Mandelbrot, award-winning mathematician, Yale University professor, and IBM Fellow; and Harry Markowitz, the father of Modern Portfolio Theory. The book is available now wherever books and e-books are sold.

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