9781119578079

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The revised and updated fourteenth edition of Investments: Analysis and Management explains the essentials of investing and supports good investment decisions. More than a simple introduction to the subject, this comprehensive textbook prepares students to handle real-world investment problems and controversies in a clear and accessible manner. Emphasizing readability, Authors Charles Jones and Gerald Jensen minimize complex formulas and simplify difficult material—enabling students of all levels and backgrounds to follow the entire discussion and delve further into the subject.

Ideally suited for beginning courses in investments, this textbook is designed as a practical guide to help students gain foundational knowledge of investing and develop the analytic skills necessary for deciphering investment issues. Carefully organized chapters guide students through fundamental investing concepts, portfolio and capital market theory, common stock analysis and valuation, fixed-income and derivative securities, the specifics of security analysis and portfolio management, and more. A broad range of pedagogical tools—including bulleted summaries, numbered examples, spreadsheet exercises, computational problems, and an extensive set of chapter review questions—strengthens student comprehension and retention.

Part 1 Background

1 Understanding Investments 1

An Overall Perspective on Investing 1

Establishing a Framework for Investing 3

A Perspective on Investing 4

The Importance of Studying Investments 5

Understanding the Investment Decision Process 9

Checking Your Understanding 14

Structuring the Decision Process 14

Important Considerations in the Investment Decision-Making Process 15

Checking Your Understanding 20

Organizing the Text 20

Summary 21

Questions 22

Spreadsheet Exercises 22

Checking Your Understanding 22

2 Investment Alternatives 24

Organizing Financial Assets 25

A Global Perspective 27

Nonmarketable Financial Assets 27

Money Market Securities 28

Checking Your Understanding 31

Capital Market Securities 31

Fixed-Income Securities 31

Checking Your Understanding 44

Equity Securities 44

Checking Your Understanding 50

Derivative Securities 51

A Final Note 53

Summary 53

Questions 54

Problems 55

Spreadsheet Exercises 55

Checking Your Understanding 56

3 Indirect Investing 57

Investing Indirectly 58

What is an Investment Company? 59

Three Major Types of Investment Companies 60

Checking Your Understanding 66

Types of Mutual Funds 66

Checking Your Understanding 72

The Net Asset Value per Share 72

The Details of Indirect Investing 73

Checking Your Understanding 78

Investment Company Performance 78

Investing Internationally through Investment Companies 83

The Future of Indirect Investing 84

Hedge Funds 85

Summary 86

Questions 87

Computational Problems 88

Spreadsheet Exercises 88

Checking Your Understanding 89

4 Securities Markets and Market Indexes 90

The Importance of Financial Markets 91

The Primary Markets 91

Checking Your Understanding 95

The Secondary Markets 95

Checking Your Understanding 101

Stock Market Indexes 101

Checking Your Understanding 108

Bond Markets 108

Derivatives Markets 109

The Globalization of Markets 109

Summary 110

Questions 110

Problems 111

Computational Problems 112

Spreadsheet Exercises 112

Checking Your Understanding 113

5 How Securities are Traded 114

Introduction 114

How Orders Work 118

Checking Your Understanding 122

Investor Protection in the Securities Markets 122

Checking Your Understanding 127

Margin 127

Short Sales 130

Checking Your Understanding 135

Summary 135

Questions 136

Problems 136

Computational Problems 137

Spreadsheet Exercises 137

Checking Your Understanding 138

Part 2 Portfolio and Capital Market Theory

6 The Risk and Return from Investing 139

An Overview 139

Return 140

Measuring Returns 141

A Global Perspective 147

Checking Your Understanding 150

Summary Statistics for Returns 150

Checking Your Understanding 154

Risk 154

Measuring Risk 156

Checking Your Understanding 160

Realized Returns and Risks from Investing 160

Compounding and Discounting 164

Summary 164

Questions 165

Demonstration Problems 166

Problems 167

Computational Problems 168

Spreadsheet Exercises 168

Checking Your Understanding 169

7 Portfolio Theory 171

Dealing with Uncertainty 171

Checking Your Understanding 176

Introduction to Modern Portfolio Theory 176

Portfolio Risk 179

Analyzing Portfolio Risk 179

Checking Your Understanding 181

The Components of Portfolio Risk 181

Checking Your Understanding 186

Calculating Portfolio Risk 186

Checking Your Understanding 189

Obtaining the Data 190

Summary 191

Questions 192

Problems 193

Computational Problems 194

Spreadsheet Exercises 194

Checking Your Understanding 195

8 Portfolio Selection and Asset Allocation 197

Building a Portfolio Using Markowitz Principles 198

The Global Perspective—International Diversification 201

Some Important Conclusions about the Markowitz Model 202

Checking Your Understanding 203

Selecting Optimal Asset Classes—The Asset Allocation Decision 203

Asset Allocation and the Individual Investor 211

Checking Your Understanding 216

The Impact of Diversification on Risk 216

The Implications of Reducing Risk by Holding Portfolios 219

Summary 219

Questions 220

Problems 220

Spreadsheet Exercises 221

Checking Your Understanding 223

9 Capital Market Theory and Asset Pricing Models 224

Capital Market Theory 225

Checking Your Understanding 229

The Capital Market Line 229

Checking Your Understanding 233

Systematic Risk and Beta 233

The Capital Asset Pricing Model (CAPM) 239

Checking Your Understanding 243

Arbitrage Pricing Theory 245

Checking Your Understanding 249

Other Prominent Factor Models 249

Some Conclusions about Asset Pricing 250

Summary 251

Questions 252

Demonstration Problems 253

Problems 254

Computational Problems 254

Spreadsheet Exercises 255

Checking Your Understanding 255

Part 3 Common Stocks: Analysis, Valuation, and Management

10 Common Stock Valuation 256

Overview 257

Discounted Cash Flow Models 258

The Dividend Discount Model 259

Checking Your Understanding 262

Growth Rate Cases for the DDM 262

Checking Your Understanding 273

Other Discounted Cash Flow Approaches 273

Checking Your Understanding 276

The Multiplier Approach 276

Other Multipliers 278

Relative Valuation Metrics 279

Which Approach to Use? 283

Bursting the Bubble on New Economy Stocks—A Lesson in Valuation 284

Checking Your Understanding 285

Some Final Thoughts on Valuation 285

Summary 286

Questions 287

Demonstration Problems 287

Problems 289

Computational Problems 290

Spreadsheet Exercises 291

Checking Your Understanding 291

11 Common Stocks: Analysis and Strategy 293

A Global Perspective 293

The Impact of the Overall Market on Stocks 294

Building Stock Portfolios 296

Checking Your Understanding 296

The Passive Strategy 296

Checking Your Understanding 301

The Active Strategy 301

Checking Your Understanding 311

Rational Markets and Active Strategies 311

A Simple Strategy: The Coffeehouse Portfolio 311

Summary 312

Questions 313

Problems 313

Computational Problems 313

Spreadsheet Exercises 314

Checking Your Understanding 314

12 Market Efficiency 315

Overview 315

The Concept of an Efficient Market 316

Checking Your Understanding 322

How to Test for Market Efficiency 322

Checking Your Understanding 327

Market Anomalies 327

Checking Your Understanding 335

Behavioral Finance 335

Checking Your Understanding 341

Some Conclusions about Market Efficiency 341

Summary 343

Questions 345

Problems 346

Checking Your Understanding 346

Part 4 Security Analysis

13 Economy/Market Analysis 347

Introduction 347

Taking a Global Perspective 348

Assessing the Economy 348

Checking Your Understanding 355

The Stock Market and the Economy 355

Checking Your Understanding 357

Understanding the Stock Market 357

Checking Your Understanding 360

Making Market Forecasts 360

Checking Your Understanding 363

Summary 367

Questions 367

Problems 368

Computational Problems 368

Spreadsheet Exercises 369

Checking Your Understanding 369

14 Sector/Industry Analysis 370

Introduction 371

What is an Industry? 372

The Importance of Sector/Industry Analysis 373

Checking Your Understanding 375

Analyzing Sectors/Industries 377

Checking Your Understanding 381

Using Sector/Industry Analysis as an Investor 383

Summary 387

Questions 387

Checking Your Understanding 388

15 Company Analysis 389

Fundamental Analysis 389

The Accounting Aspects of Earnings 390

Checking Your Understanding 397

The Problems with EPS 397

Checking Your Understanding 401

Using the Financial Statements to Analyze FCF, ROE, and EPS 401

Checking Your Understanding 406

Earnings Estimates 406

The Multiplier 410

Fundamental Security Analysis in Practice 414

Summary 416

Questions 417

Problems 418

Computational Problems 418

Spreadsheet Exercises 419

Checking Your Understanding 420

16 Technical Analysis 421

Introduction 422

What is Technical Analysis? 422

Checking Your Understanding 425

Stock Price and Volume Techniques 425

Checking Your Understanding 431

Technical Indicators 435

Testing Technical Analysis Strategies 437

The Ebb and Flow of Technical Analysis 439

Some Conclusions about Technical Analysis 439

Summary 441

Questions 442

Computational Problems 442

Checking Your Understanding 442

Part 5 Fixed-Income Securities: Analysis, Valuation, and Management

17 Bond Yields and Prices 443

Introduction 443

Bond Yields and Interest Rates 444

Measuring Bond Yields 451

Checking Your Understanding 457

Checking Your Understanding 459

Bond Prices 459

Bond Price Changes 461

Checking Your Understanding 465

Summary 465

Questions 466

Problems 467

Computational Problems 468

Spreadsheet Exercises 468

Checking Your Understanding 469

18 Bonds: Analysis and Strategy 470

Why Buy Bonds? 470

Important Considerations in Managing a Bond Portfolio 474

Checking Your Understanding 475

Bond Strategies and Techniques 475

Passive Management Strategies 476

Active Management Strategies 478

Managing Price Volatility 482

Checking Your Understanding 490

Immunization 490

Summary 494

Questions 495

Problems 496

Computational Problems 496

Spreadsheet Exercises 497

Checking Your Understanding 497

Part 6 Derivative Securities

19 Options 498

Why Have Derivative Securities? 499

Introduction to Options 499

Understanding Options 501

Checking Your Understanding 501

Checking Your Understanding 505

Payoffs and Profits from Basic Option Positions 505

Some Basic Options Strategies 510

Checking Your Understanding 513

Option Valuation 513

Checking Your Understanding 522

An Investor’s Perspective on Puts and Calls 522

Stock Index Options 524

Summary 527

Questions 528

Problems 529

Computational Problems 529

Spreadsheet Exercises 530

Checking Your Understanding 531

20 Futures Contracts 532

An Overview of Futures Markets 532

The Structure of Futures Markets 535

Checking Your Understanding 537

The Mechanics of Trading 537

Checking Your Understanding 542

Using Futures Contracts 542

Checking Your Understanding 545

Financial Futures 545

Single Stock Futures 553

Summary 554

Questions 555

Problems 556

Computational Problems 556

Checking Your Understanding 556

Part 7 Investment Management

21 Managing Your Financial Assets 557

A Perspective on Investing in Financial Assets 557

Managing Your Financial Assets 558

Checking Your Understanding 560

Formulate an Appropriate Investment Strategy 560

Investor Objectives 560

Checking Your Understanding 563

What Issues Do Investors Face in Their Financial Planning? 563

Investor Expectations as a Part of Financial Planning 566

Checking Your Understanding 567

Implementing Investing Strategies 568

Basic Investment Management Strategies 570

Financial Planning on an Ongoing Basis 571

Checking Your Understanding 573

Rebalancing a Portfolio of Financial Assets 573

Determining the Success of Your Financial Planning 574

Summary 574

Questions 575

Spreadsheet Exercises 577

Checking Your Understanding 578

22 Evaluation of Investment Performance 579

A Framework for Evaluating and Assessing Portfolio Performance 580

Performance Measurement Issues 580

Checking Your Understanding 586

Risk-Adjusted Measures of Performance 588

Checking Your Understanding 589

Checking Your Understanding 595

Measures of Downside Risk 596

Style Analysis and Performance Attribution 598

Money Managers and Performance Presentations 600

Checking Your Understanding 601

An Overview on Performance Evaluation 601

Summary 602

Questions 603

Problems 604

Computational Problems 605

Spreadsheet Exercises 606

Checking Your Understanding 607

Glossary G-1

Index I-1

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Investments

Investments

1119578078

Summary

Table of Contents

Supplemental Materials