Portfolio Construction and Risk Budgeting (5th edition) - Risk Books
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Portfolio Construction and Risk Budgeting (5th Edition)

By Bernd Scherer


Building on the solid foundation of the previous bestselling editions, this significantly extended fifth edition of Portfolio Construction and Risk Budgeting updates content and incorporates a more practical approach than previous editions.

Bernd Scherer provides a critical review of a range of portfolio management techniques highlighting strengths, weaknesses and how to implement quantitatively-driven portfolio construction.

Get the introduction as a PDF here

Publish date: 27 Apr 2015

Availability: In stock

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Book - Portfolio Construction and Risk Budgeting (5th Edition)

Book description

Completely updated and extended to cover the rapid expansion of the literature since the financial crises, this new edition of Portfolio Construction and Risk Budgeting provides the reader with a clear overview of the subject. The author presents quantitative methods and comprehensive and up-to-date coverage of alternative portfolio construction techniques, ranging from traditional methods based on mean– variance and lower-partial moments approaches, through Bayesian techniques, to more recent developments such as portfolio re-sampling and stochastic programming solutions using scenario optimisation.

Chapters feature:

•    Application in Mean–Variance Investing
•    Incorporating Deviations from Normality
•    Portfolio Resampling and Estimation Error
•    Robust Portfolio Optimisation and Estimation Error
•    Bayesian Analysis and Portfolio Choice

This new edition is highly recommended for practitioners including portfolio managers, consultants, strategists, marketers and quantitative analysts.

Book details

Book - 9781782721000 / eBook - 9781782722342
Publish date
27 Apr 2015
155mm x 235mm

Author biography

Bernd Scherer

Bernd Scherer is Chief Scientific Officer for First Private Asset Management. During his 21 years career he worked in senior positions for various hedge funds, asset management companies and banks in Frankfurt, London, New York and Vienna as well as Professor of Finance for EDHEC business school. His academic work has been published in Journals like the Journal of Banking and Finance, Journal of Financial Markets, Journal of Economics and Statistics, Quantitative Finance, Journal of Derivatives, Journal of Portfolio Management, Financial Analysts Journal, Journal of Investment Management, Risk, Financial Markets and Portfolio Management, Journal of Asset Management etc.. Bernd is author/editor of 8 books on quantitative asset management. He holds MBA and MSc degrees from the University of Augsburg and the University of London, as well as a PhD in finance from the University of Giessen.

Table of contents

1.    A Primer on Portfolio Theory

2.    Application in Mean–Variance Investing

3.    Diversification - NEW CHAPTER

4.    Frictional diversification costs - NEW CHAPTER

5.    Risk Parity - NEW CHAPTER

6.    Incorporating Deviations from Normality: Lower Partial Moments

7.    Portfolio Resampling and Estimation Error

8.    Robust Portfolio Optimisation and Estimation Error

9.    Bayesian Analysis and Portfolio Choice

10.    Testing Portfolio Construction Methodologies Out-of-Sample

11.    Portfolio Construction with Transaction Costs

12.    Portfolio Optimisation with Options: From the Static Replication of CPPI Strategies to a More General Framework

13.    Scenario Optimisation

14.    Core–Satellite Investing: Budgeting Active Manager Risk

15.    Benchmark-Relative Optimisation

16.    Removing Long-Only Constraints: 120/20 Investing

17.    Performance-Based Fees, Incentives and Dynamic Tracking Error Choice

18.    Long-Term Portfolio Choice

19.    Risk Management for Asset-Management Companies

20.    Valuation of Asset Management Firms

21.    Tail Risk Hedging


"Dr. Scherer's "Portfolio Construction and Risk Budgeting" book is a unique blend of rigor and relevance, undoubtedly due to the particularly rich background of the author in both academia and investment management. Its most attractive feature is perhaps that it very convincingly emphasizes that risk management, defined as the art and science of spending investors' risk and dollar budgets in the most efficient way, is the key source of added-value in investment management. A careful reading of this book will be time well invested for any practitioner in investment management, or any student who wants to enter the field."

Lionel Martellini, Professor of Finance at EDHEC Business School and Scientific Director of EDHEC Risk Institute

"Dr. Scherer’s book is insightful, comprehensive and accessible. Just as intelligent diversification of return sources characterizes portfolio construction, creative use of diverse learning tools – verbal intuition, formal equations and graphical aids – characterizes this new edition as it covers a wide range of topics.

Mean-variance optimization is justly at the core, but what are its underlying assumptions and practical pitfalls? How can we best deal with the challenges of estimation errors and model uncertainty? Which assumptions simplify the mean-variance approach to popular strategies such as ‘1/n’, risk parity, minimum variance, or maximum diversification? What is the impact of trading costs, benchmarks, and constraints? Can these concepts be applied beyond standard asset problems and extended to active manager allocation, valuation and risk management of asset management firms, or tail risk hedging? It is all here."

Antti Ilmanen, Principal, AQR Capital Management

"This book provides a unique practically relevant and intellectually rigorous approach to portfolio construction and risk budgeting. I have used earlier editions and plan to continue to use the latest edition to teach courses in portfolio management. Scherer's book lays an excellent foundation since it provides a comprehensive and intuitive introduction to the most important topics in portfolio construction. What makes it particularly valuable for practitioners is the incorporation of real-world investment constraints and institutional considerations as well as the notation which facilitates the empirical application of the material."

Professor Robert Kosowski, Imperial College Business School, CEPR and Oxford-Man Institute.

"The fifth edition of Bernd’s text is an encyclopedic treatment of the rigorous management of investment portfolios. Not only does it provide a robust treatment of all major aspects of portfolio construction, this book uniquely examines many of the rarely discussed, often unrecorded, assumptions embedded in various theoretical constructs.  The book provides useful and transparent recipes for addressing the endless number of “fine print” issues that face practitioners. In doing so, this work can make the difference between truly successful investment practice, and reliance on methods that are similar in outline but lack the necessary depth of detail."
Dan Di Bartolomeo, Ph.D., President, Northfield Information Services

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