This is a review of James Picerno’s Quantitative Investment Portfolio Analytics in R. Overall, it’s about as fantastic a book as you can get on portfolio optimization until you start getting into corner cases stemming from large amounts of assets.
Here’s a quick summary of what the book covers:
1) How to install R.
2) How to create some rudimentary backtests.
4) Mean-Variance Optimization.
5) Factor Analysis
6) Bootstrapping/Monte-Carlo simulations.
7) Modeling Tail Risk
8) Risk Parity/Vol Targeting
9) Index replication
10) Estimating impacts of shocks
11) Plotting in ggplot
12) Downloading/saving data.
All in all, the book teaches the reader many fantastic techniques to get started doing some basic portfolio management using asset-class ETFs, and under the assumption of ideal data–that is, that there are few assets with concurrent starting times, that the number of assets is much smaller than the number of observations (I.E. 10 asset class ETFs, 90 day lookback windows, for instance), and other attributes taken for granted to illustrate concepts. I myself have used these concepts time and again (and, in fact, covered some of these topics on this blog, such as volatility targeting, momentum, and mean-variance), but in some of the work projects I’ve done, the trouble begins when the number of assets grows larger than the number of observations, or when assets move in or out of the investable universe (EG a new company has an IPO or a company goes bankrupt/merges/etc.). It also does not go into the PortfolioAnalytics package, developed by Ross Bennett and Brian Peterson. Having recently started to use this package for a real-world problem, it produces some very interesting results and its potential is immense, with the large caveat that you need an immense amount of computing power to generate lots of results for large-scale problems, which renders it impractical for many individual users. A quadratic optimization on a backtest with around 2400 periods and around 500 assets per rebalancing period (days) took about eight hours on a cloud server (when done sequentially to preserve full path dependency).
However, aside from delving into some somewhat-edge-case appears-more-in-the-professional-world topics, this book is extremely comprehensive. Simply, as far as managing a portfolio of asset-class ETFs (essentially, what the inimitable Adam Butler and crew from ReSolve Asset Management talk about, along with Walter’s fantastic site, AllocateSmartly), this book will impart a lot of knowledge that goes into doing those things. While it won’t make you as comfortable as say, an experienced professional like myself is at writing and analyzing portfolio optimization backtests, it will allow you to do a great deal of your own analysis, and certainly a lot more than anyone using Excel.
While I won’t rehash what the book covers in this post, what I will say is that it does cover some of the material I’ve posted in years past. And furthermore, rather than spending half the book about topics such as motivations, behavioral biases, and so on, this book goes right into the content that readers should know in order to execute the tasks they desire. Furthermore, the content is presented in a very coherent, English-and-code, matter-of-fact way, as opposed to a bunch of abstract mathematical derivations that treats practical implementation as an afterthought. Essentially, when one buys a cookbook, they don’t get it to read half of it for motivations as to why they should bake their own cake, but on how to do it. And as far as density of how-to, this book delivers in a way I think that other authors should strive to emulate.
Furthermore, I think that this book should be required reading for any analyst wanting to work in the field. It’s a very digestible “here’s how you do X” type of book. I.E. “here’s a data set, write a backtest based on these momentum rules, use an inverse-variance weighting scheme, do a Fama-French factor analysis on it”.
In any case, in my opinion, for anyone doing any sort of tactical asset allocation analysis in R, get this book now. For anyone doing any sort of tactical asset allocation analysis in spreadsheets, buy this book sooner than now, and then see the previous sentence. In any case, I’ll certainly be keeping this book on my shelf and referencing it if need be.
Thanks for reading.
Note: I am currently contracting but am currently on the lookout for full-time positions in New York City. If you know of a position which may benefit from my skills, please let me know. My LinkedIn profile can be found here.