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Investments

by: Bodie, Zvi; Kane, Alex; Marcus, Alan J.

Investments

by: Bodie, Zvi; Kane, Alex; Marcus, Alan J.

ISBN 13:
9780072861785
ISBN 10:
0072861789
Format: Hardcover
Copyright: 12/01/2003
Publisher: McGraw-Hill College
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Summary

Prepared by Bruce Swenson of Adelphi University, provides detailed solutions to the end of chapter problems. This manual is available bundled with the text for students to purchase by permission of the instructor by ordering ISBN 0072976322.

PART ONE INTRODUCTION

(134)

CHAPTER 1 THE INVESTMENT ENVIRONMENT

(28)

1.1 Real Assets versus Financial Assets

(2)

1.2 Financial Markets and the Economy

(5)

Consumption Timing

(1)

Allocation of Risk

(1)

Separation of Ownership and Management

(1)

A Crisis in Corporate Governance

(3)

Accounting Scandals

(2)

Analyst Scandals

(1)

Initial Public Offerings

(1)

1.3 Clients of the Financial System

(3)

The Household Sector

(1)

The Business Sector

(1)

The Government Sector

(1)

1.4 The Environment Responds to Clientele Demands

(6)

Financial Intermediation

(2)

Investment Banking

(1)

Financial Innovation and Derivatives

(1)

Response to Taxation and Regulation

(2)

1.5 Markets and Market Structure

(1)

1.6 Ongoing Trends

(4)

Globalization

(1)

Securitization

(2)

Financial Engineering

(1)

Computer Networks

(1)

Summary

(1)

Key Terms

(1)

Websites

(1)

Problems

(2)

Standard and Poor's

(1)

E-Investments: Track Your Portfolio

(1)

Solutions to Concept Checks

(1)

CHAPTER 2 FINANCIAL INSTRUMENTS

(34)

2.1 The Money Market

(3)

Treasury Bills

(1)

Certificates of Deposit

(1)

Commercial Paper

(1)

Bankers' Acceptances

(1)

Eurodollars

(1)

Repos and Reverses

(1)

Federal Funds

(1)

Brokers' Calls

(1)

The LIBOR Market

(1)

Yields on Money Market Instruments

(1)

2.2 The Bond Market

(9)

Treasury Notes and Bonds

(1)

Federal Agency Debt

(2)

International Bonds

(1)

Municipal Bonds

(2)

Corporate Bonds

(1)

Mortgages and Mortgage-Backed Securities

(2)

2.3 Equity Securities

(3)

Common Stocks as Ownership Shares

(1)

Characteristics of Common Stock

(1)

Stock Market Listings

(1)

Preferred Stock

(1)

2.4 Stock and Bond Market Indexes

(7)

Stock Market Indexes

(1)

Dow Jones Averages

(3)

Standard & Poor's Indexes

(1)

Other U.S. Market-Value Indexes

(1)

Equally Weighted Indexes

(1)

Foreign and International Stock Market Indexes

(1)

Bond Market Indicators

(1)

2.5 Derivative Markets

(4)

Options

(3)

Futures Contracts

(1)

Summary

(1)

Key Terms

(1)

Websites

(1)

Problems

(3)

Standard and Poor's

(1)

E-Investments: Security Prices and Returns

(1)

Solutions to Concept Checks

(2)

CHAPTER 3 HOW SECURITIES ARE TRADED

(42)

3.1 How Firms Issue Securities

(5)

Investment Bankers and Underwriting

(2)

Shelf Registration

(1)

Private Placements

(1)

Initial Public Offerings

(3)

3.2 Where Securities Are Traded

(6)

The Secondary Markets

(1)

The Over-the-Counter Market

(2)

The Third and Fourth Markets

(1)

The National Market System

(1)

Bond Trading

(1)

3.3 Trading on Exchanges

(5)

The Participants

(1)

Types of Orders

(2)

Market Orders

(1)

Limit Orders

(2)

Specialists and the Execution of Trades

(1)

Block Sales

(1)

The SuperDOT System

(1)

Settlement

(1)

3.4 Trading on the OTC Market

(4)

Market Structure in Other Countries

(1)

London

(1)

Euronext

(1)

Tokyo

(1)

Globalization of Stock Markets

(1)

3.5 Trading Costs

(2)

3.6 Buying on Margin

(3)

3.7 Short Sales

(3)

3.8 Regulation of Securities Markets

(5)

Government Regulation

(1)

Regulatory Responses to Recent Scandals

(1)

Self-Regulation and Circuit Breakers

(2)

Insider Trading

(1)

Summary

(1)

Key Terms

100

(1)

Websites

100

(1)

Problems

101

(4)

Standard and Poor's

105

(1)

E-Investments: Short Sales

105

(1)

Solutions to Concept Checks

105

(2)

CHAPTER 4 MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES

107

(28)

4.1 Investment Companies

108

(1)

4.2 Types of Investment Companies

109

(3)

Unit Investment Trusts

109

(1)

Managed Investment Companies

109

(2)

Other Investment Organizations

111

(1)

Commingled Funds

111

(1)

Real Estate Investment Trusts (REITS)

111

(1)

Hedge Funds

111

(1)

4.3 Mutual Funds

112

(4)

Investment Policies

112

(1)

Money Market Funds

112

(1)

Equity Funds

112

(1)

Bond Funds

113

(1)

International Funds

113

(1)

Balanced and Income Funds

113

(1)

Asset Allocation and Flexible Funds

113

(1)

Index Funds

113

(2)

How Funds Are Sold

115

(1)

4.4 Costs of Investing in Mutual Funds

116

(3)

Fee Structure

116

(1)

Front-End Load

116

(1)

Back-End Load

116

(1)

Operating Expenses

116

(1)

2b-1 Charges

116

(1)

Fees and Mutual Fund Returns

117

(2)

4.5 Taxation of Mutual Fund Income

119

(1)

4.6 Exchange-Traded Funds

120

(2)

4.7 Mutual Fund Investment Performance: A First Look

122

(3)

4.8 Information on Mutual Funds

125

(4)

Summary

129

(1)

Key Terms

129

(1)

Websites

130

(1)

Problems

131

(2)

Standard and Poor's

133

(1)

E-Investments: Choosing a Mutual Fund

133

(1)

Solutions to Concept Checks

133

(2)

PART TWO PORTFOLIO THEORY

135

(144)

CHAPTER 5 HISTORY OF INTEREST RATES AND RISK PREMIUMS

137

(28)

5.1 Determinants of the Level of Interest Rates

138

(4)

Real and Nominal Rates of Interest

138

(1)

The Equilibrium Real Rate of Interest

139

(1)

The Equilibrium Nominal Rate of Interest

140

(1)

Bills and Inflation, 1963-2002

141

(1)

Taxes and the Real Rate of Interest

142

(1)

5.2 Risk and Risk Premiums

142

(2)

5.3 The Historical Record

144

(6)

Bills, Bonds, and Stocks, 1926-2002

144

(6)

5.4 Real Versus Nominal Risk

150

(1)

5.5 Return Distributions and Value at Risk

151

(3)

5.6 A Global View of the Historical Record

154

(1)

5.7 Forecasts for the Long Haul

154

(2)

Summary

156

(1)

Key Terms

157

(1)

Websites

157

(1)

Problems

158

(4)

Standard and Poor's

162

(1)

E-Investments: Analytics Tutorial

162

(1)

Solutions to Concept Checks

162

(1)

Appendix: Continuous Compounding

162

(3)

CHAPTER 6 RISK AND RISK AVERSION

165

(32)

6.1 Risk and Risk Aversion

166

(7)

Risk with Simple Prospects

166

(1)

Risk, Speculation, and Gambling

167

(1)

Risk Aversion and Utility Values

168

(5)

6.2 Portfolio Risk

173

(6)

Asset Risk versus Portfolio Risk

173

(1)

A Review of Portfolio Mathematics

174

(60)

Rule 1

174

(1)

Rule 2

174

(1)

Rule 3

175

(1)

Rule 4

175

(3)

Rule 5

178

(1)

Summary

179

(1)

Key Terms

179

(1)

Websites

179

(1)

Problems

180

(2)

Standard and Poor's

182

(1)

E-Investments: Risk and Return

182

(1)

Solutions to Concept Checks

182

(2)

Appendix A: A Defense of Mean-Variance Analysis

184

(7)

Appendix B: Risk Aversion. Expected Utility, and the St. Petersburg Paradox

191

(6)

CHAPTER 7 CAPITAL ALLOCATION BETWEEN THE RISKY ASSET AND THE RISK-FREE ASSET

197

(26)

7.1 Capital Allocation across Risky and Risk-Free Portfolios

198

(2)

7.2 The Risk-Free Asset

200

(1)

7.3 Portfolios of One Risky Asset and One Risk-Free Asset

201

(4)

7.4 Risk Tolerance and Asset Allocation

205

(5)

7.5 Passive Strategies: The Capital Market Line

210

(4)

Summary

214

(1)

Key Terms

214

(1)

Websites

215

(1)

Problems

215

(4)

Standard and Poor's

219

(1)

E-Investments: The S&P 500

219

(1)

Solutions to Concept Checks

219

(4)

CHAPTER 8 OPTIMAL RISKY PORTFOLIOS

223

(56)

8.1 Diversification and Portfolio Risk

224

(1)

8.2 Portfolios of Two Risky Assets

225

(9)

8.3 Asset Allocation with Stocks, Bonds, and Bills

234

(6)

The Ultimate Risky Portfolio with Two Risky Assets and a Risk-Free Asset

235

(5)

8.4 The Markowicz Portfolio Selection Model

240

(6)

Security Selection

240

(6)

8.5 The Spreadsheet Model

246

(8)

Calculation of Expected Return and Variance

246

(5)

Capital Allocation and the Separation Property

251

(2)

Asset Allocation and Security Selection

253

(1)

8.6 Optimal Portfolios with Restrictions on the Risk-Free Asset

254

(4)

Summary

258

(1)

Key Terms

259

(1)

Websites

259

(1)

Problems

260

(6)

E-Investments: Risk Comparisons

266

(1)

Solutions to Concept Checks

266

(3)

Appendix A: The Power of Diversification

269

(3)

Appendix B: The Insurance Principle: Risk-sharing versus Risk-Pooling

272

(2)

Appendix C: The Fallacy of Time Diversification

274

(5)

PART THREE EQUILIBRIUM IN CAPITAL MARKETS

279

(166)

CHAPTER 9 THE CAPITAL ASSET PRICING MODEL

281

(36)

9.1 The Capital Asset Pricing Model

281

(11)

Why Do All Investors Hold the Market Portfolio?

283

(2)

The Passive Strategy Is Efficient

285

(1)

The Risk Premium of the Market Portfolio

285

(1)

Expected Returns on Individual Securities

286

(3)

The Security Market Line

289

(3)

9.2 Extensions of the APM

292

(5)

The CAPM with Restricted Bon-owing: The Zero-Beta Model

293

(4)

Lifetime Consumption and the CAPM

297

(1)

9.3 The CAPM and Liquidity

297

(6)

Summary

303

(1)

Key Terms

304

(1)

Websites

304

(1)

Problems

304

(5)

Standard and Poor's

309

(1)

E-Investments: Beta Comparisons

309

Solutions to Concept Checks 3

(301)

Appendix: Demand for Stocks and Equilibrium Prices

311

(6)

CHAPTER 10 INDEX MODELS

317

(26)

10.1 A Single-Index Security Market

318

(8)

Systematic Risk versus Firm-Specific Risk

318

(3)

Estimating the Index Model

321

(3)

The Index Model and Diversification

324

(2)

10.2 The CAPM and the Index Model

326

(3)

Actual Returns versus Expected Returns

326

(1)

The Index Model and Realized Returns

326

(1)

The Index Model and the Expected Return-Beta Relationship

327

(2)

10.3 The Industry Version of the Index Model

329

(5)

Predicting Betas

333

(1)

10.4 Index Models and Tracking Portfolios

334

(2)

Summary

336

(1)

Key Terms

336

(1)

Websites

336

(1)

Problems

336

(4)

Standard and Poor's

340

(1)

E-Investments: Comparing Volatilities and Beta Coefficients

340

(1)

Solutions to Concept Checks

341

(2)

CHAPTER 11 ARBITRAGE PRICING THEORY AND MULTIFACTOR MODELS OF RISK AND RETURN

343

(26)

11.1 Multifactor Models: An Overview

344

(4)

Factor Models of Security Returns

344

(2)

A Multifactor Security Market Line

346

(2)

11.2 Arbitrage Pricing Theory

348

(7)

Arbitrage, Risk Arbitrage, and Equilibrium

349

(1)

Well-Diversified Portfolios

350

(1)

Beta and Expected Returns

351

(2)

The One-Factor Security Market Line

353

(2)

11.3 Individual Assets and the APT

355

(1)

The APT and the CAPM

356

(1)

11.4 A Multifactor APT

356

(2)

11.5 Where Should We Look for Factors?

358

(3)

11.6 A Multifactor CAPM

361

(1)

Summary

362

(1)

Key Terms

363

(1)

Websites

363

(1)

Problems

363

(4)

Standard and Poor's

367

(1)

E-Investments: APT versus CAPM

368

(1)

Solutions to Concept Checks

368

(1)

CHAPTER 12 MARKET EFFICIENCY AND BEHAVIORAL FINANCE

369

(46)

12.1 Random Walks and the Efficient Market Hypothesis

370

(3)

Competition as the Source of Efficiency

372

(1)

Versions of the Efficient Market Hypothesis

373

(1)

12.2 Implications of the EMH

373

(8)

Technical Analysis

373

(4)

Fundamental Analysis

377

(1)

Active versus Passive Portfolio Management

378

(2)

The Role of Portfolio Management in an Efficient Market

380

(1)

Resource Allocation

380

(1)

12.3 Event Studies

381

(3)

12.4 Are Markets Efficient?

384

(12)

The Issues

384

(2)

The Magnitude Issue

384

(1)

The Selection Bias Issue

385

(1)

The Lucky Event Issue

385

(1)

Weak-Form Tests: Patterns in Stock Returns

386

(2)

Returns over Short Horizons

386

(1)

Returns over Long Horizons

387

(1)

Predictors of Broad Market Returns

388

(1)

Semistrong Tests: Market Anomalies

388

(6)

The Small-Firm-in-January effect

389

(2)

The Neglected-Firm Effect and Liquidity Effects

391

(1)

Book-to-Market Ratios

391

(1)

Post-Earnings-Announcement Price Drift

392

(2)

Strong-Form Tests: Inside Information

394

(1)

Interpreting the Evidence

394

(2)

Risk Premiums or Inefficiencies?

394

(2)

Anomalies or Data Mining?

396

(1)

12.5 A Behavioral Interpretation

396

(5)

Information Processing

397

(1)

Forecasting Errors

397

(1)

Overconfidence

397

(1)

Conservatism

398

(1)

Sample-Size Neglect and Representativeness

398

(1)

Behavioral Biases 398

Framing

398

(1)

Mental Accounting

398

(1)

Regret Avoidance

399

(1)

Limits to Arbitrage

399

(1)

Fundamental Risk

399

(1)

Implementation Costs

400

(1)

Model Risk

400

(1)

Evaluating the Behavioral Critique

400

(1)

12.6 Mutual Fund Performance

401

(4)

So, Are Markets Efficient?

405

(1)

Summary

405

(1)

Key Terms

406

(1)

Websites

406

(1)

Problems

407

(6)

Standard and Poor's

413

(1)

E-Investments: Efficient Markets and Insider Trading

413

(1)

Solutions to Concept Checks

413

(2)

CHAPTER 13 EMPIRICAL EVIDENCE ON SECURITY RETURNS

415

(30)

13.1 The Index Model and the Single-Factor APT

416

(10)

The Expected Return-Beta Relationship

416

(2)

Setting Up the Sample Data

417

(1)

Estimating the SCL

417

(1)

Estimating the SML

417

(1)

Tests of the CAPM

418

(1)

The Market Index

419

(3)

Measurement Error in Beta

422

(2)

The EMH and the CAPM

424

(1)

Accounting for Human Capital and Cyclical Variations in Asset Betas

424

(2)

13.2 Tests of Multifactor CAPM and APT

426

(3)

A Macro Factor Model

426

(3)

13.3 The Fama-French Three-Factor Model

429

(3)

13.4 Time-Varying Volatility

432

(3)

13.5 The Equity Premium Puzzle

435

(3)

Expected versus Realized Returns

435

(2)

Survivorship Bias

437

(1)

13.6 Survivorship Bias and Tests of Market Efficiency

438

(3)

Summary

441

(1)

Key Terms

441

(1)

Websites

441

(1)

Problems

442

(2)

Standard and Poor's

444

(1)

E-Investments: Portfolio Theory

444

(1)

Solutions to Concept Checks

444

(1)

PART FOUR FIXED-INCOME SECURITIES

445

(124)

CHAPTER 14 BOND PRICES AND YIELDS

447

(40)

14.1 Bond Characteristics

448

(7)

Treasury Bonds and Notes

448

(2)

Accrued Interest and Quoted Bond Prices

450

(1)

Corporate Bonds

450

(2)

Call Provisions on Corporate Bonds

451

(1)

Convertible Bonds

452

(1)

Puttable Bonds

452

(1)

Floating-Rate Bonds

452

(1)

Preferred Stock

452

(1)

Other Issuers

453

(1)

International Bonds

453

(1)

Innovation in the Bond Market

453

(2)

Inverse Floaters

454

(1)

Asset-Backed Bonds

454

(1)

Catastrophe Bonds

454

(1)

Indexed Bonds

454

(1)

14.2 Bond Pricing

455

(4)

Bond Pricing between Coupon Dates

458

(1)

14.3 Bond Yields

459

(7)

Yield to Maturity

459

(3)

Yield to Call

462

(2)

Realized Compound Yield versus Yield to Maturity

464

(2)

14.4 Bond Prices over Time

466

(5)

Yield to Maturity versus Holding-Period Return

468

(1)

Zero-Coupon Bonds

468

(1)

After-Tax Returns

469

(2)

14.5 Default Risk and Bond Pricing

471

(7)

Junk Bonds

471

(1)

Determinants of Bond Safety

471

(3)

Bond Indentures

474

(1)

Sinking Funds

474

(14)

Subordination of Further Debt

475

(1)

Dividend Restrictions

475

(1)

Collateral

476

(1)

Yield to Maturity and Default Risk

477

(1)

Summary

478

(1)

Key Terms

479

(1)

Websites

479

(1)

Problems

480

(5)

Standard and Poor's

485

(1)

E-Investments: Credit Spreads

485

(1)

Solutions to Concept Checks

485

(2)

CHAPTER 15 THE TERM STRUCTURE OF INTEREST RATES

487

(32)

15.1 The Term Structure Under Certainty

488

(7)

Bond Pricing

488

(3)

Bond Stripping and Pricing of Coupon Bonds

491

(1)

Holding-Period Returns

492

(1)

Forward Rates

493

(2)

15.2 Interest Rate Uncertainty and Forward Rates

495

(2)

15.3 Theories of the Term Structure

497

(1)

The Expectations Hypothesis

497

(1)

Liquidity Preference

497

(1)

15.4 Interpreting the Term Structure

498

(5)

15.5 Forward Rates as Forward Contracts

503

(2)

15.6 Measuring the Term Structure

505

(4)

Summary

509

(1)

Key Terms

509

(1)

Websites

509

(1)

Problems

510

(6)

E-Investments: Expectations and Term Spreads

516

(1)

Solutions to Concept Checks

516

(3)

CHAPTER 16 MANAGING BOND PORTFOLIOS

519

(50)

16.1 Interest Rate Risk

520

(11)

Interest Rate Sensitivity

520

(3)

Duration

523

(4)

What Determines Duration?

527

(4)

Rule 1 for Duration

528

(1)

Rule 2 for Duration

528

(1)

Rule 3 for Duration

528

(1)

Rule 4 for Duration

529

(1)

Rule 5 for Duration

529

(1)

Rule 6 for Duration

530

(1)

Rule 7 for Duration

530

(1)

Rule 8 for Duration

530

(1)

16.2 Convexity

531

(5)

Why Do Investors Like Convexity?

534

(1)

Duration and Convexity of Callable Bonds

534

(2)

16.3 Passive Bond Management

536

(11)

Bond-Index Funds

537

(1)

Immunization

538

(8)

Cash Flow Matching and Dedication

546

(1)

Other Problems with Conventional Immunization

546

(1)

16.4 Active Bond Management

547

(4)

Sources of Potential Profit

547

(1)

Horizon Analysis

548

(1)

Contingent Immunization

549

(2)

16.5 Interest Rate Swaps

551

(2)

Swaps and Balance Sheet Restructuring

552

(1)

The Swap Dealer

552

(1)

16.6 Financial Engineering and Interest Rate Derivatives

553

(2)

Summary

555

(1)

Key Terms

556

(1)

Websites

556

(1)

Problems

557

(9)

Standard and Poor's

566

(1)

E-Investments: Bond Calculations

566

(1)

Solutions to Concept Checks

566

(3)

PART FIVE SECURITY ANALYSIS

569

(126)

CHAPTER 17 MACROECONOMIC AND INDUSTRY ANALYSIS

571

(34)

17.1 The Global Economy

572

(2)

17.2 The Domestic Economy

574

(2)

17.3 Demand and Supply Shocks

576

(1)

17.4 Federal Government Policy

576

(3)

Fiscal Policy

577

(1)

Monetary Policy

578

(1)

Supply-Side Policies

579

(1)

17.5 Business Cycles

579

(6)

The Business Cycle

579

(2)

Economic Indicators

581

(4)

17.6 Industry Analysis

585

(10)

Defining an Industry

586

(1)

Sensitivity to the Business Cycle

587

(3)

Sector Rotation

590

(1)

Industry Life Cycles

591

(3)

Start-Up Stage

592

(1)

Consolidation Stage

592

(1)

Maturity Stage

592

(1)

Relative Decline

593

(1)

Industry Structure and Performance

594

(12)

Threat of Entry

594

(1)

Rivalry between Existing Competitors

594

(1)

Pressure from Substitute Products

594

(1)

Bargaining Power of Buyers

594

(1)

Bargaining Power of Suppliers

595

(1)

Summary

595

(1)

Key Terms

595

(1)

Websites

595

(1)

Problems

596

(6)

Standard and Poor's

602

(1)

E-Investments: The Macroeconomy

602

(1)

Solutions to Concept Checks

602

(3)

CHAPTER 18 EQUITY VALUATION MODELS

605

(50)

18.1 Valuation by Companies

606

(2)

Limitations of Book Value

607

(1)

18.2 Intrinsic Value versus Market Price

608

(1)

18.3 Dividend Discount Models

609

(13)

The Constant-Growth DDM

611

(3)

Convergence of Price to Intrinsic Value

614

(1)

Stock Prices and Investment Opportunities

615

(3)

Life Cycles and Multistage Growth Models

618

(4)

Multistage Growth Models

622

(1)

18.4 Price-Earnings Ratio

622

(12)

The Price-Earnings Ratio and Growth Opportunities

622

(4)

PIE Ratios and Stock Risk

626

(1)

Pitfalls in PIE Analysis

627

(4)

Combining P/E Analysis and the DDM

631

(1)

Other Comparative Valuation Ratios

632

(24)

Price-to-Book Ratio

632

(1)

Price-to-Cash-Flow Ratio

632

(1)

Price-to-Sales Ratio

633

(1)

18.5 Corporate Finance and the Free Cash Flow Approach

634

(2)

18.6 Inflation and Equity Valuation

636

(3)

18.7 The Aggregate Stock Market

639

(1)

Explaining Past Behavior

639

(1)

Forecasting the Stock Market

640

(2)

Summary

642

(1)

Key Terms

643

(1)

Websites

643

(1)

Problems

644

(7)

Standard and Poor's

651

(1)

E-Investments: Equity Valuation

652

(1)

Solutions to Concept Checks

652

(3)

CHAPTER 19 FINANCIAL STATEMENT ANALYSIS

655

(40)

19.1 The Major Financial Statements

656

(3)

The Income Statement

656

(1)

The Balance Sheet

657

(1)

The Statement of Cash Flows

658

(1)

19.2 Accounting versus Economic Earnings

659

(1)

19.3 Return on Equity

660

(4)

Past versus Future ROE

661

(1)

Financial Leverage and ROE

662

(2)

19.4 Ratio Analysis

664

(7)

Decomposition of ROE

664

(1)

Turnover and Other Asset Utilization Ratios

665

(2)

Liquidity and Coverage Ratios

667

(1)

Market Price Ratios

667

(3)

Choosing a Benchmark

670

(1)

19.5 Economic Value Added

671

(1)

19.6 An Illustration of Financial Statement Analysis

672

(2)

19.7 Comparability Problems

674

(6)

Inventory Valuation

674

(1)

Depreciation

675

(1)

Inflation and Interest Expense

676

(1)

Quality of Earnings

676

(3)

International Accounting Conventions

679

(1)

19.8 Value Investing: The Graham Technique

680

(1)

Summary

681

(1)

Key Terms

682

(1)

Websites

682

(1)

Problems

683

(9)

Standard and Poor's

692

(1)

E-Investments: Financial Statement Analysis

693

(1)

Solutions to Concept Checks

693

(2)

PART SIX OPTIONS, FUTURES, AND OTHER DERIVATIVES

695

(164)

CHAPTER 20 OPTIONS MARKETS: INTRODUCTION

697

(48)

20.1 The Option Contract

698

(7)

Options Trading

700

(2)

American and European Options

702

(1)

Adjustments in Option Contract Terms

702

(1)

The Option Clearing Corporation

702

(1)

Other Listed Options

703

(2)

Index Options

703

(2)

Futures Options

705

(1)

Foreign Currency Options

705

(1)

Interest Rate Options

705

(1)

20.2 Values of Options at Expiration

705

(6)

Call Options

705

(2)

Put Options

707

(2)

Option versus Stock Investments

709

(2)

20.3 Option Strategies

711

(8)

Protective Put

711

(2)

Covered Calls

713

(2)

Straddle

715

(1)

Spreads

716

(1)

Collars

716

(3)

20.4 The Put-Call Parity Relationship

719

(2)

20.5 Optionlike Securities

721

(7)

Callable Bonds

721

(2)

Convertible Securities

723

(2)

Warrants

725

(1)

Collateralized Loans

726

(1)

Levered Equity and Risky Debt

727

(1)

20.6 Financial Engineering

728

(3)

20.7 Exotic Options

731

(1)

Asian Options

731

(1)

Barrier Options

731

(1)

Lookback Options

731

(1)

Currency-Traded Options

731

(1)

Binary Options

732

(1)

Summary

732

(1)

Key Terms

732

(1)

Websites

732

(1)

Problems

733

(7)

Standard and Poor's

740

(1)

E-Investments: Options and Straddles

740

(1)

Solutions to Concept Checks

740

(5)

CHAPTER 21 OPTION VALUATION

745

(46)

21.1 Option Valuation: Introduction

746

(2)

Intrinsic and Time Values

746

(1)

Determinants of Option Values

747

(1)

21.2 Restrictions on Option Values

748

(4)

Restrictions on the Value of a Call Option

749

(2)

Early Exercise and Dividends

751

(1)

Early Exercise of American Puts

751

(1)

21.3 Binomial Option Pricing

752

(6)

Two-State Option Pricing

752

(3)

Generalizing the Two-State Approach

755

(3)

21.4 Black-Scholes Option Valuation

758

(9)

The Black-Scholes Formula

759

(6)

Dividends and Call Option Valuation

765

(1)

Put Option Valuation

766

(1)

21.5 Using the Black-Scholes Formula

767

(11)

Hedge Ratios and the Black-Scholes Formula

767

(3)

Portfolio Insurance

770

(4)

Hedging Bets on Mispriced Options

774

(4)

21.6 Empirical Evidence on Option Pricing

778

(1)

Summary

779

(1)

Key Terms

780

(1)

Websites

780

(1)

Problems

781

(6)

Standard and Poor's

787

(1)

E-Investments: Black-Scholes Option Pricing

788

(1)

Solutions to Concept Checks

788

(3)

CHAPTER 22 FUTURES MARKETS

791

(30)

22. The Futures Contract

792

(4)

The Basics of Futures Contracts

792

(4)

Existing Contracts

796

(1)

22.2 Mechanics of Trading in Futures Markets

796

(6)

The Clearinghouse and Open Interest

796

(3)

Marking to Market and the Margin Account

799

(2)

Cash versus Actual Delivery

801

(1)

Regulations

802

(1)

Taxation

802

(1)

22.3 Futures Markets Strategies

802

(4)

Hedging and Speculation

802

(3)

Basis Risk and Hedging

805

(1)

22.4 The Determination of Futures Prices

806

(5)

The Spot-Futures Parity Theorem

806

(3)

Spreads

809

(1)

Forward versus Futures Pricing

810

(1)

22.5 Futures Prices versus Expected Spot Prices

811

(2)

Expectation Hypothesis

811

(1)

Normal Backwardation

812

(1)

Contango

812

(1)

Modern Portfolio Theory

812

(1)

Summary

813

(1)

Key Terms

814

(1)

Websites

814

(1)

Problems

815

(2)

Standard and Poor's

817

(1)

E-Investments: Contract Specifications for Financial Futures and Options

818

(1)

Solutions to Concept Checks

818

(3)

CHAPTER 23 FUTURES AND SWAPS: A CLOSER LOOK

821

(38)

23.1 Foreign Exchange Futures

822

(7)

The Markets

822

(1)

Interest Rate Parity

822

(4)

Direct versus Indirect Quotes

826

(1)

Using Futures to Manage Exchange Rate Risk

826

(3)

23.2 Stock Index Futures

829

(8)

The Contracts

829

(1)

Creating Synthetic Stock Positions: An Asset Allocation Tool

830

(2)

Empirical Evidence on Pricing of Stock-Index Futures

832

(2)

Index Arbitrage and the Triple-Witching Hour

834

(1)

Using Index Futures to Hedge Market Risk

835

(2)

23.3 Interest Rate Futures

837

(3)

Hedging Interest Rate Risk

837

(2)

Other Interest Rate Futures

839

(1)

23.4 Commodity Futures Pricing

840

(4)

Pricing with Storage Costs

840

(3)

Discounted Cash Flow Analysis for Commodity Futures

843

(1)

23.5 Swaps

844

(5)

Swap Pricing

846

(1)

Credit Risk in the Swap Market

847

(1)

Swap Variations

848

(1)

Summary

849

(1)

Key Terms

850

(1)

Websites

850

(1)

Problems

851

(5)

Standard and Poor's

856

(1)

E-Investments: Describing Different Swaps

856

(1)

Solutions to Concept Checks

857

(2)

PART SEVEN ACTIVE PORTFOLIO MANAGEMENT

859

(146)

CHAPTER 24 PORTFOLIO PERFORMANCE EVALUATION

861

(44)

24.1 Measuring Investment Returns

862

(4)

Time-Weighted Returns versus Dollar-Weighted Returns

862

(1)

Arithmetic versus Geometric Averages

863

(3)

24.2 The Conventional Theory of Performance Evaluation

866

(11)

The M2 Measure of Performance (M'-)

869

(1)

Sharpe's Measure as the Criterion for Overall Portfolios

870

(1)

Appropriate Performance Measures in Three Sections

871

(3)

Jane's Portfolio Represents Her Entire Risky Investment Fund

871

(1)

Jane's Portfolio Is an Active Portfolio and Is Mixed with a Passive Market Index

872

(1)

Jane's Choice Portfolio Is One of Many Portfolios Combined into a Large Investment Fund

872

(2)

Relationships among the Various Performance Measures

874

(1)

Actual Performance Measurement: An Example

875

(1)

Realized Returns versus Expected Returns

875

(2)

24.3 Performance Measurement with Changing Portfolio Composition

877

(2)

24.4 Market Timing

879

(2)

24.5 Performance Attribution Procedures

881

(5)

Asset Allocation Decisions

883

(1)

Sector and Security Selection Decisions

884

(1)

Summing Up Component Contributions

885

(1)

24.6 Style Analysis

886

(3)

24.7 Morningstar's Risk-Adjusted Rating

889

(1)

24.8 Evaluating Performance Evaluation

890

(2)

Summary

892

(1)

Key Terms

893

(1)

Websites

893

(1)

Problems

894

(7)

Standard and Poor's

901

(1)

E-Investments: Performance of Mutual Funds

902

(1)

Solutions to Concept Checks

902

(3)

CHAPTER 25 INTERNATIONAL DIVERSIFICATION

905

(34)

25.1 Global Markets for Equities

906

(4)

Developed Countries

906

(1)

Emerging Markets

906

(2)

Market Capitalization and GDP

908

(2)

Home-Country Bias

910

(1)

25.2 Risk Factors in International Investing

910

(7)

Exchange Rate Risk

910

(4)

Country-Specific Risk

914

(3)

25.3 International Investing: Risk, Return, and Benefits from Diversification

917

(10)

Risk and Return: Summary Statistics

918

(1)

Are Investments in Emerging Markets Riskier?

918

(1)

Are Average Returns in Emerging Markets Greater?

918

(2)

Is Exchange Rate Risk Important in International Portfolios?

920

(1)

Benefits from International Diversification

921

(1)

Misleading Representation of Diversification Benefits

922

(3)

Realistic Benefits from international Diversification

925

(2)

Are Benefits from international Diversification Preserved in Bear Markets?

927

(1)

25.4 International Investing and Performance Attribution

927

(5)

Constructing a Benchmark Portfolio of Foreign Assets

928

(1)

Performance Attribution

929

(3)

Summary

932

(1)

Key Terms

932

(1)

Websites

933

(1)

Problems

933

(4)

Standard and Poor's

937

(1)

E-Investments: International Diversification

937

(1)

Solutions to Concept Checks

937

(2)

CHAPTER 26 THE PROCESS OF PORTFOLIO MANAGEMENT

939

(42)

26.1 Making Investment Decisions

940

(3)

Objectives

940

(2)

Individual Investors

942

(1)

Personal Trusts

942

(1)

Mutual Funds

942

(1)

Pension Funds

942

(1)

Endowment Funds

942

(1)

Life Insurance Companies

942

(1)

Non-Life Insurance Companies

943

(1)

Banks

943

(1)

26.2 Constraints

943

(3)

Liquidity

944

(1)

Investment Horizon

944

(1)

Regulations

944

(1)

Tax Considerations

944

(1)

Unique Needs

944

(2)

26.3 Asset Allocation

946

(2)

Policy Statements

947

(1)

Taxes and Asset Allocation

947

(1)

26.4 Managing Portfolios of Individual Investors

948

(7)

Human Capital and Insurance

948

(1)

Investment in Residence

949

(1)

Saving for Retirement and the Assumption of Risk

949

(1)

Retirement Planning Models

950

(1)

Manage Your Own Portfolio or Rely on Others?

950

(2)

Tax Sheltering

952

(3)

The Tax-Deferral Option

952

(1)

Tax-Deferred Retirement Plans

953

(1)

Deferred Annuities

953

(1)

Variable and Universal Life Insurance

954

(1)

26.5 Pension Funds

955

(5)

Defined Contribution Plans

955

(1)

Defined Benefit Plans

956

(1)

Alternative Perspectives on Defined Benefit Pension Obligations

956

(1)

Pension Investment Strategies

957

(27)

Investing in Equities

958

(1)

Wrong Reasons to Invest in Equities

959

(1)

26.6 Future Trends in Portfolio Management

960

(1)

Summary

961

(1)

Key Terms

962

(1)

Websites

962

(1)

Problems

963

(10)

E-Investments: Personal Diversification

973

(1)

Solutions to Concept Checks

973

(1)

Appendix: A Spreadsheet Model for Long-Term Investing

974

(7)

CHAPTER 27 THE THEORY OF ACTIVE PORTFOLIO MANAGEMENT

981

(24)

27.1 The Lure of Active Management

982

(1)

27.2 Objectives of Active Portfolios

983

(1)

27.3 Market Timing

984

(4)

Valuing Market Timing as an Option

986

(1)

The Value of Imperfect Forecasting

987

(1)

27.4 Security Selection: The Treynor-Black Model

988

(7)

Overview of the Treynor-Black Model

988

(1)

Portfolio Construction

989

(6)

27.5 Multifactor Models and Active Portfolio Management

995

(1)

27.6 Imperfect Forecasts of Alpha Values and the Use of the Treynor-Black Model in Industry

996

(2)

Summary

998

(1)

Key Terms

999

(1)

Problems

999

(3)

Solutions to Concept Checks

1002

(3)

APPENDIX A Quantitative Review

1005

(38)

APPENDIX B References to CFA Questions

1043

(4)

APPENDIX C Glossary

1047

(14)

NAME INDEX

1061

(4)

SUBJECT INDEX

1065

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0072861789

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Investments

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9780072861785

0072861789

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