Modern Asset Allocation for Wealth Management

Book Title:                Modern Asset Allocation for Wealth Management

Author:           David M. Berns PhD (2019) 1^st Edition, Wiley Finance

Harry Markowitz introduced the Modern Portfolio Theory in 1952 and was awarded the Nobel Prize in Economics in 1990 for his work. This theory is taught in all Investment modules the world over and it explains the concept of diversification very well. Using the Modern Portfolio Theory, one can derive an ‘Efficient Frontier’ where the asset allocation is optimal for various levels of risk. Unfortunately, it is not as practical to implement in real life, when advising clients.

David Berns’ Modern Asset Allocation for Wealth Management provides a more complete and practical guide to asset allocation. Instead of using mean and variance to measure asset class performance, the author also incorporates the third and fourth ‘statistical moments’, which are skewness and kurtosis into the framework. In addition, this book’s methodology differs in that the client’s risk profile is evaluated based on behavioural finance theory. Traditional models typically utilise a risk tolerance questionnaire to assess how much risk an investor can take but this framework measures the client’s risk profile based on three parameters, namely (i) risk aversion, (ii) loss aversion and (iii) reflection.

With the three-dimensional client utility function, the portfolio optimiser provides a comprehensive view of the client’s preference mapped to portfolios constructed based on statistically valid data which is minimally sensitive to estimation errors.

The book is broken down into five chapters. Chapter 1 introduces the asset allocation methodology. In Chapters 2 to 5, the book provides a step by step guide to constructing the investment portfolio based on the client’s preference. The general assumptions in the framework include a long term view of investments in the assets that are highly liquid and allowing withdrawals to only occur after retirement.  These are valid and necessary assumptions made to reduce the complexity of the framework.

MBA students and final year degree students in finance, as well as practising financial advisors will find this book useful as it provides a practical and complete guide to construct a portfolio of assets that meets the investor’s needs.