Scenarios for Risk Management and Global Investment Strategies (The Wiley Finance Series)

Scenarios for Risk Management and Global Investment Strategies (The Wiley Finance Series)
by Rachel E. S. Ziemba, William T. Ziemba

Scenarios for Risk Management and Global Investment Strategies (The Wiley Finance Series)
By Rachel E. S. Ziemba, William T. Ziemba

Publisher: Wiley
Number Of Pages: 334
Publication Date: 2008-01-09
ISBN-10 / ASIN: 0470319240
ISBN-13 / EAN: 9780470319246
Binding: Hardcover


This book discusses scenarios for risk management and developing global investment strategies. What are the chances that various future events will occur over time and how should these events and probable occurrence influence investment decisions? Assessing all possible outcomes is fundamental to risk management, financial engineering and investment and hedge fund strategies. A careful consideration of future scenarios will lead to better investment decisions and avoid financial disasters. The book presents tools and case studies around the world for analyzing a wide variety of investment strategies, building scenarios to optimize returns.

Summary: A Pretty Interesting Book
Rating: 4
I read Dr. Ziemba’s book “Beat the Racetrack” years ago, and thought I’d see what other market inefficiency tricks I could learn from him. He gives an excellent overview of the Kelly system, including its caveat (Kelly Fraction of 1 gives optimal return over the long-run, but at the expense of high volatility).
The chapter on lotteries was quite interesting, as was the one on the risk behavior of legendary investors like Warren Buffet and Ed Thorpe. Also interesting were the chapters on various hedge fund disasters (LTCM, Amaranth, and a prescient hint that the Matador Fund might be next). He even talks about rogue traders, which we have heard about in the news thanks to Societe Generale’s problems.
Two main messages of the book can be summed up as follows:
1) NEVER OVERBET relative to one’s capital, and
2) DIVERSIFY (to minimize risk from improbable but high-impact events).
Dr. Ziemba’s daughter wrote the global scenario sections, which were fairly interesting as well. There are a couple of chapters on China that are real eye-openers. For instance, IPOs in China are designed to bail out faltering state-run entities. It’s a different set of rules over there in China! For international investors, the main risks appear to be currency fluctuations and political instability.
Why only 4 stars? Well, it’s quite a technical book. The chapter on hedge fund strategies was totally confusing, and the section on modeling various portfolio asset allocations wasn’t very helpful to me. The chapter on optimal Kelly Fractions wasn’t too helpful to me either, as an individual investor. The historical numbers I’ve looked at don’t support Dr. Ziemba’s (Long Bond – SP500 Earnings Yield) market crash model. While the theory makes logical sense, the numbers don’t predict accurately enough to be useful.
To me, the book was well worth the price I paid for it. If you’re afraid of math or a novice investor, this book isn’t for you. But there is a lot that can be learned from this book if you take the time to carefully study it.

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