Portfolio Construction and Analytics The Frank J. Fabozzi Series FixedIncomeSecurities,SecondEditionbyFrankJ.Fabozzi Focus on Value: A Corporate and Investor Guide to Wealth Creation by JamesL.GrantandJamesA.Abate HandbookofGlobalFixedIncomeCalculationsbyDragomirKrgin Managing a Corporate Bond Portfolio by Leland E. Crabbe and Frank J.Fabozzi RealOptionsandOption-EmbeddedSecuritiesbyWilliamT.Moore Capital Budgeting: Theory and Practice by Pamela P. Peterson and Frank J.Fabozzi TheExchange-TradedFundsManualbyGaryL.Gastineau ProfessionalPerspectivesonFixedIncomePortfolioManagement,Volume3 editedbyFrankJ.Fabozzi InvestinginEmergingFixedIncomeMarketseditedbyFrankJ.Fabozziand EfstathiaPilarinu HandbookofAlternativeAssetsbyMarkJ.P.Anson The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, and MooradChoudhry TheHandbookofFinancialInstrumentseditedbyFrankJ.Fabozzi Interest Rate, Term Structure, and Valuation Modeling edited by Frank J.Fabozzi InvestmentPerformanceMeasurementbyBruceJ.Feibel TheHandbookofEquityStyleManagementeditedbyT.DanielCogginand FrankJ.Fabozzi The Theory and Practice of Investment Management edited by Frank J.FabozziandHarryM.Markowitz FoundationsofEconomicValueAdded,SecondEditionbyJamesL.Grant Financial Management and Analysis, Second Edition by Frank J. Fabozzi andPamelaP.Peterson Measuring and Controlling Interest Rate and Credit Risk, Second Edition byFrankJ.Fabozzi,StevenV.Mann,andMooradChoudhry ProfessionalPerspectivesonFixedIncomePortfolioManagement,Volume4 editedbyFrankJ.Fabozzi The Handbook of European Fixed Income Securities edited by Frank J.FabozziandMooradChoudhry TheHandbookofEuropeanStructuredFinancialProductseditedbyFrank J.FabozziandMooradChoudhry The Mathematics of Financial Modeling and Investment Management by SergioM.FocardiandFrankJ.Fabozzi ShortSelling:Strategies,Risks,andRewardseditedbyFrankJ.Fabozzi The Real Estate Investment Handbook by G. Timothy Haight and Daniel Singer MarketNeutralStrategieseditedbyBruceI.JacobsandKennethN.Levy SecuritiesFinance:SecuritiesLendingandRepurchaseAgreementseditedby FrankJ.FabozziandStevenV.Mann Fat-Tailed and Skewed Asset Return Distributions by Svetlozar T. Rachev, ChristianMenn,andFrankJ.Fabozzi FinancialModelingoftheEquityMarket:FromCAPMtoCointegrationby FrankJ.Fabozzi,SergioM.Focardi,andPetterN.Kolm Advanced Bond Portfolio Management: Best Practices in Modeling and Strategies edited by Frank J. Fabozzi, Lionel Martellini, and Philippe Priaulet AnalysisofFinancialStatements,SecondEditionbyPamelaP.Petersonand FrankJ.Fabozzi CollateralizedDebtObligations:StructuresandAnalysis,SecondEditionby DouglasJ.Lucas,LaurieS.Goodman,andFrankJ.Fabozzi HandbookofAlternativeAssets,SecondEditionbyMarkJ.P.Anson Introduction to Structured Finance by Frank J. Fabozzi, Henry A. Davis, andMooradChoudhry Financial Econometrics by Svetlozar T. Rachev, Stefan Mittnik, Frank J.Fabozzi,SergioM.Focardi,andTeoJasic Developments in Collateralized Debt Obligations: New Products and Insights by Douglas J. Lucas, Laurie S. Goodman, Frank J. Fabozzi, and RebeccaJ.Manning RobustPortfolioOptimizationandManagementbyFrankJ.Fabozzi,Peter N.Kolm,DessislavaA.Pachamanova,andSergioM.Focardi AdvancedStochasticModels,RiskAssessment,andPortfolioOptimizations bySvetlozarT.Rachev,StoganV.Stoyanov,andFrankJ.Fabozzi How to Select Investment Managers and Evaluate Performance by G.TimothyHaight,StephenO.Morrell,andGlennE.Ross BayesianMethodsinFinancebySvetlozarT.Rachev,JohnS.J.Hsu,Biliana S.Bagasheva,andFrankJ.Fabozzi SimulationandOptimizationinFinance:ModelingwithMATLAB,@RISK, orVBA+WebsitebyDessislavaA.PachamanovaandFrankJ.Fabozzi TheHandbookofMunicipalBondseditedbySylvanG.FeldsteinandFrank J.Fabozzi Subprime Mortgage Credit Derivatives by Laurie S. Goodman, Shumin Li, DouglasJ.Lucas,ThomasAZimmerman,andFrankJ.Fabozzi IntroductiontoSecuritizationbyFrankJ.FabozziandVinodKothari Structured Products and Related Credit Derivatives edited by Brian P.Lancaster,GlennM.Schultz,andFrankJ.Fabozzi HandbookofFinance:VolumeI:FinancialMarketsandInstrumentsedited byFrankJ.Fabozzi Handbook of Finance: Volume II: Financial Management and Asset Man- agementeditedbyFrankJ.Fabozzi Handbook of Finance: Volume III: Valuation, Financial Modeling, and QuantitativeToolseditedbyFrankJ.Fabozzi Finance:CapitalMarkets,FinancialManagement,andInvestmentManage- mentbyFrankJ.FabozziandPamelaPeterson-Drake ActivePrivateEquityRealEstateStrategyeditedbyDavidJ.Lynn Foundations and Applications of the Time Value of Money by Pamela Peterson-DrakeandFrankJ.Fabozzi Leveraged Finance: Concepts, Methods, and Trading of High-Yield Bonds, Loans, and Derivatives by Stephen Antczak, Douglas Lucas, and Frank J.Fabozzi ModernFinancialSystems:TheoryandApplicationsbyEdwinNeave InstitutionalInvestmentManagement:EquityandBondPortfolioStrategies andApplicationsbyFrankJ.Fabozzi RobustEquityPortfolioManagement+WebsitebyWooChangKim,Jang HoKim,andFrankJ.Fabozzi Portfolio Construction and Analytics DESSISLAVA A. PACHAMANOVA FRANK J. FABOZZI Copyright©2016byDessislavaA.PachamanovaandFrankJ.Fabozzi.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,or otherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyright Act,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthrough paymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222 RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)646-8600,orontheWeb atwww.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothe PermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030, (201)748-6011,fax(201)748-6008,oronlineathttp://www.wiley.com/go/permissions. 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Classification:LCCHG4529.5.F334562016(print)|LCCHG4529.5(ebook)| DDC332.6—dc23 LCrecordavailableathttp://lccn.loc.gov/2015040278 CoverDesign:Wiley CoverImage:©kentoh/Shutterstock PrintedintheUnitedStatesofAmerica 10987654321 Dessislava A. Pachamanova To my parents, Rositsa and Angel Frank J. Fabozzi To my wife, Donna, and my children, Karly, Patricia, and Francesco