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Title: Asset Pricing and Portfolio Performance: Models, Strategy and Performance Metrics by Robert A. Korajczyk ISBN: 1-899332-36-7 Publisher: Risk Books Pub. Date: June, 1999 Format: Paperback List Price(USD): $230.00

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Average Customer Rating: 5 (1 review)

Rating: 5
Summary: Deserves to find its way into every finance library
Comment: Robert Korajczyk's "Asset Pricing and Portfolio Performance"

Reviewed by Craig W. French

One might wonder, since the bulk of Robert Korajczyk's "Asset Pricing and Portfolio Performance: Models, Strategy and Performance Metrics" (London: Risk Books 1999) is available through JSTOR and at public libraries at virtually no cost, whether it is reasonable to spend two hundred dollars on such a volume. This consideration certainly crossed my mind. The correct conclusion is in the affirmative, for there are two valuable sources of alpha in this collection of nineteen of the most influential works in the financial economics literature.

First, Dr. Korajczyk's introduction provides a clear and concise survey of the twin topics of asset pricing and performance evaluation. The nineteen papers, whose reprints comprise the book, are grouped into four primary categories - section 1, asset pricing theory; section 2, tests of the models and anomalous empirical evidence; section 3, structural market imperfections; and section 4, performance evaluation. Dr. Korajczyk does a commendable job of discussing these areas of financial economics and provides a nice contextual framework for the papers he has selected.

The second source of value-added is chapter 2, which, for the first time, publishes the capital asset pricing model that Jack L. Treynor developed in 1962. This paper alone is worth many times the cost of the book. Although Treynor (1962) was circulated during the 1960s and has been cited (usually with the inaccurate date of 1961) in important seminal papers of prominent financial economists, the paper had heretofore fallen by the wayside in the history of the CAPM. Prior to publication in "Asset Pricing and Portfolio Performance", Treynor (1962) was not publicly available, and could only be found in private collections. Dr. Korajczyk has done both the academic and practitioner communities a great service by publishing Mr. Treynor's CAPM.

Section 1 includes Treynor (1962), Sharpe (1964), Merton (1973 and 1987) and Ross (1976). These works introduced the single-period discrete-time CAPM, the intertemporal CAPM, the APT and the extension of the CAPM to include asymmetric information. I would have liked, if not the paper itself (as a chapter), to see at least some discussion of the important interpretation of Fama (1968) in Dr. Korajczyk's introduction. Also, no mention of Rubinstein (1973) is made, which incorporated higher moments well before Ingersoll (1975) and Kraus and Litzenberger (1976), and also derived the CAPM without a riskless asset independently of Black (1972).

Section 2 is comprised of some of the noteworthy tests of asset pricing models and the anomalies that have been found as a result. The papers of Fama and French (1992 and 1996), Jegadeesh and Titman (1993), Daniel and Titman (1997), Brennan, Chordia and Subrahmanyam (1998) and Ferson and Harvey (1991) can be found here. While section 1 focused on early work, Section 2 avoids the original research in this vein, such as the papers by Black, Jensen and Scholes (1972) and Fama and MacBeth (1973). However, their findings are discussed in Fama and French (1992), which is reprinted as chapter 6, so the reader is not too deprived by their absence. Of course, a single volume is hardly enough to contain much of the anomaly literature, and Dr. Korajczyk chooses to focus on collections of anomalies and/or models, which necessarily excludes the earliest work. This choice offers an economical presentation of a broad scope of work in the territory.

Section 3 offers three papers that explore two market frictions, transactions costs and illiquidity. Amihud and Mendelson (1986), Brennan and Subrahmanyam (1996) and Jagannathan and Wang (1996) explore these areas. While Dr. Korajczyk discusses the earliest contribution, that of Mayers (1973), in his introduction, I wish it too had been included as a chapter in this section.

Section 4 presents five excellent studies on the topic of performance evaluation, including Grinblatt and Titman (1989), Jagannathan and Korajczyk (1986), Leland (1999), Ferson and Schadt, (1996), and Brown, Goetzmann, Ibbotson and Ross (1992). Dr. Korajczyk does an impressive job of reviewing the literature on this topic in his introduction, covering the early studies of Treynor (1965), Sharpe (1966), Treynor and Mazuy (1966), Jensen (1968), Jensen (1972), Treynor and Black (1973), as well as most of the important later studies. However, I was disappointed not to see any discussion of Carhart (1997), which really deserves to have been included as a chapter in the book.

In summary, the consolidation of these important papers into a single volume provides a convenient reference text for both students of finance and investment professionals. My few points of criticism essentially indicate a wish for more. "Asset Pricing and Portfolio Performance" is a large volume that stands tall on my bookshelf, dwarfing more manageable tomes such as Merton's "Continuous-Time Finance", Markowitz' "Portfolio Selection" and Cox and Rubinstein's "Options Markets". With its attractive cover art, it would also sit comfortably on the coffee table. Those who prefer British spelling conventions will be especially pleased with this book. Dr. Korajczyk has produced a useful and unique compendium that deserves to find its way into the library of every academic and practitioner in the investment community.