Essentials of investments

CHATER
ContentsPART ONEELEMENTS OF INVESTMENTS
CHAPTER
Investments:Background and Issues
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1.1 Real Assets versus Financial Assets
1.2 A Taxonomy of Financial Assets
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1.3 Financial Markets and the Economy
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CHAPTER
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Consumption Timing
Allocation of Risk
Separation of Ownership andManagement
1.4 The Investment Process
1.5 Markets Are Competitive
The Risk-Return Trade-Off
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Efficient Markets
CHAPER
CHAPTER
1.6 The Players
Financial Intermediaries
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1.7 Markets and Market Structure
Investment Bankers
Auction Markets
Brokered Markets
Direct Search Markets
CHAPTER
Dealer Markets
Globalization
1.8 Recent Trends
CHAPTER
Securitization
CHAPTER
CHAPTER
CHAPTER
Financial Engineering
1.9 Outline of the Text
CHAPTER
Summary
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Financial Markets and Instruments
2.1 The Money Market
Treasury Bills
Bank Discount Yields
Commercial Paper
Bankers Acceptances
Certifcates of Deposit
Brokers Calls
Repos and Reverses
Eurodollars
The LIBOR Market
Federal Funds
Yields on Money Market Instruments
2.2 The Fixed-Income Capital Market
Treasury Notes and Bonds
Federal Agency Debt
Municipal Bands
Mortgages and Mortage-BackedSecurities
Corporate Bonds
Common Stock as Ownership Shares
2.3 Equity Securities
Stock Market Listings
Characteristics of Common Stock
Preferred Stock
Stock Market Indexes
2.4 Stock and Bond Market Indexes
Dow Jones Averages
Standard Poor s Indexes
Other Market Value Indexes
Foreign and International Stock MarketIndexes
Equally Weighted Indexes
Bond Market Indicators
2.5 Derivative Markets
Options
Futures Contracts
Summary
3.1 How Firms Issue Securities
How Securities Are Traded
Investment Banking
Shelf Registration
Initial Public Offerings
The Secondary Markets
3.2 Where Securities Are Traded
The Third and Fourth Markets
The Over-the-Counter Market
The Participants
3.3 Trading on Exchanges
The National Market System
Types of Orders
Specialists and the Execution of Trades
Block Sales
The DOT System
Settlement
3.4 Trading on the OTC Market
Market Structure in Other Countries
3.5 Trading Costs
3.6 Buying on Margin
3.7 Short Sales
3.8 Regulation of Securities Markets
Self-Regulation and Circuit Breakers
Insider Trading
Summary
Mutual Funds and Other InvestmentComPanies
4.1 Investment Companies
4.2 Types of Investment Companies
Unit Investment Trusts
Managed Investment Companies
Other Investment Organizations
4.3 Mutual Funds
Investment Policies
How Funds Are Sold
Fee Structure
4.4 Costs of Investing in Mutual Funds
Fees and Mutual Fund Returns
4.5 Taxation of Mutual Fund Income
4.6 Mutual Fund Investment Performance:AFirst Look
4.7 Information on Mutual Funds
Summary
Investors and the Investment Process
5.1 Investors and Objectives
Professional Investors
Individual lnvestors
Pension Funds
Nonlife lnsurance Companies
Banks
Life Insurance Companies
5.2 Investor Constraints
Endowment Funds
Liquidity
Investment Horizon
Regulations
The Considerations
Unique Needs
5.3 Objectives and Constraints of VariousInvestors
Objectives
Constraints
5.4 Investment Policies
Top-Down Policies for InstitutionalInvestors
Active versus Passive Policies
Tax-Shelter Options
5.5 Taxes and Investment Strategy
5.6 Monitoring and Revising InvestmentPortfolios
Summary
PARTTWOPORTFOLIO THEORY
Measuring Investment Returns over MultiplePeriods
6.1 Rates of Retum
Risk and Return:Past and Prologue
Conventions for Quoting Rates ofReturn
Scenario Analysis and ProbabilityDistributions
6.2 Risk and Risk Premiums
Bills,Bonds,and Stocks,1926-1996
6.3 The Historical Record
6.4 Inflation and Real Rates of Return
The Equilibrium Nominal Rate ofInterest
6.5 Asset Allocation Across Risky and Risk-FreePortfolios
The Risky Asset
The Risk-Free Asset
Portfolio Expected Return and Risk
The Capital Allocation Line
Risk Tolerance and Asset Allocation
6.6 Passive Strategies and the Capital MarketLine
Historical Evidence on the Capital MarketLine
Summary
Costs and Benefits of Passive Investing
Efficient Diversification
7.1 Diversification and Portfolio Risk
7.2 Asset Allocation with Two RiskyAssets
Covariance and Correlation
The Three Rules of Two-Risky-AssetPortfolios
The Risk-Return Trade-Off with TWo-Risky-Asset Portfolios
Mean-Variance Criteria
Using Historical Data
7.3 The Optimal Risky Portfolio with a Risk-Free Asset
The Efficient Frontier of Risky Assets
7 4 Edducient Diversification with Many RiskyAssets
Choosing the Optimal Risky Portfolio
7.5 A Single-Factor Asset Market
The Preferred Complete Portfolio and theSeparation Property
Specification of a Single-Index Model ofSecurity Returns
Statistical and Graphical Representation ofthe Single-Index Model
Summary
Diversification in a Single-Factor SecurityMarket
Appendix:The Fallacy of TimeDiversification
Capital Asset Pricing and Arbitrage PricingTheory
8.1 The Capital Asset Pricing Model
Why All Investors Would Hold the MarketPortfolio
The Risk Premium of the MarketPortfolio
The Passive Strategy Is Efficient
Expected Returns on IndividualSecurities
The Security Market Line
Applications of the CAPM
8.2 The CAPM and Index Models
The Index Model,Realized Returns,and theExpected Return-Beta Relationship
Estimating the Index Model
The CAPM and the Index Model
Predicting Betas
8.3 The CAPM and the Real World
8.4 Arbitrage Pricing Theory
Arbitrage Opportunities and Profits
Well-Diversified Portfolios and the ArbitragePricing Theory
Multifactor Generalization of the APT andCAPM
The APT and the CAPM
Summary
The Efficient Market Hypothesis
9.1 Random Walks and the Efficient MarketHypothesis
Competition as the Source of Efficiency
Versions of the Efficient MarketHypothesis
Technical Analysis
9.2 Implications of the EMH for InvestmentPolicy
Active versus Passive PortfolioManagement
Fundamental Analysis
The Role of Portfolio Management in anEfficient Market
The Issues
9.3 Are Markets Efficient?
Tests of Predictability in Stock MarketReturns
Predictors of Broad Market Movements
Portfolio Strategies and MarketAnomalies
Scientific and Computing Power in Search ofAbnormal Returns
Summary
So,Are Markets Efficient?
PAR THREEFIXED-INCOME SECURITIES
Bond Prices and Yields
10.1 Bond Characteristics
Treasury Bonds and Notes
Corporate Bonds
Preferred Stock
International Bonds
Other Domestic Issuers
Innovation in the Bond Market
10.2 Default Risk
Junk Bonds
Determinants of Bond Safety
Bond Indentures
10.3 Bond Pricing
Yield to Matmity
10.4 Bond Yields
Yield to Call
Yield to Maturity and Default Risk
Realized Compound Yield versus Yield toMaturity
Yield to Maturity versus Holding-PeriodReturn
10.5 Bond Prices over Time
Zero-Coupon Bonds
After-Tax Recturns
The Expectations Theory
10.6 The Yield Curve
The Liquidity Preference Theory
Market Segmentation Theory
A Synthesis
Summary
Managing Fixed-Income Investments
11.1 Interest Rate Risk
Interest Rate Sensitivity
Duration
What Determines Duration?
11.2 Passive Bond Management
Target Date Immunization
Net worth Immunization
Cash Flow Matching and Dedication
11.3 Convexity
Sources of Potential Profit
11.4 Active Bond Management
Contingent Immunization
Horizon Analysis
An Example of a Fixed-Income ImestmentStrategy
11.5 Interest Rate Swaps
Summary
PARTFOURSECURITY ANALYSIS
Macroeconomic and Industry Analysis
12.1 The Global Economy
12.2 The Domestic Macroeconomy
Inflation
Employment
Gross Domestic Product
Budget Deficit
12.3 Interest Rates
Interest Rates
Sentiment
12.4 Demand and Supply Shocks
12.5 Federal Govemment Policy
Fiscal Policy
Monetary Policy
Supply-Side Policies
The Business Cycle
12.6 Business Cycles
Economic Indicators
Defining an Industry
12.7 Industry Analysis
Sensitivity to the Business Cycle
Industry Life Cycles
Industry Structure and Performance
Summary
Equity Valuation
13.1 Balance Sheet Valuation Methods
13.2 Intrinsic Value versus Market Price
13.3 Dividend Discount Models
The Constant Growth DDM
Stock Prices and InvestmentOpportunities
Life Cycles and Multistage GrowthModels
13.4 Price/Earnings Ratios
The Price/Earnings Ratio and GrowthOpportunities
P/E Ratios and Stock Risk
Pitfalls in P/E Analysis
13.5 The Aggregate Stock Market
Combining P/E Analysis and the DDM
Summary
Financial Statement Analysis
The Balance Sheet
The Income Statement
14.1 The Major Financial Statements
The Statement of Cash Flows
14.2 Accounting versus Economic Earnings
14.3 Return on Equity
Financial Leverage attd ROE
Past versus Future ROE
Decomposition of ROE
14.4 Ratio Analysis
Turnover and Other Asset UtilizationRatios
Liquidity and Coverage Ratios
Market Pric e Ratios
14.5 An Illustration of Financial StatementAnalysis
14.6 Comparability Problems
Inventory Valuation
Depreciation
Inflation and Interest Expense
International Accunting Conventions
Inflation Accounting
14.7 Value Investing:The GrahamTechnique
Summary
Technical Analysis
15.1 Technical Analysis
15.2 Charting
The Dow Theory
Other Charring Techniques
A Warning
15.3 Technical Indicators
Sentiment Indicators
Market Structure
Flow of Funds
15.4 The Value Line System
Self-Desnucting Patterns
15.5 Can Technical Analysis Work in EfficientMarkets?
A New View of Technical Analysis
Summary 43lPART FIVEDERIVATIVE ASSETS:OPTIONSAND FUTURES
OPtions Markets
16.1 The Option Contract
Options Trading
The Option Clearing Corporation
American and European Options
Other Listed Options
16.2 Values of Options at Expiration
Call Options
Put Options
Options versus Stock Investments
The Put-Call Pariy Relationship
Option Strategies
16.3 Option-Like Securities
Callable Bonds
Convertible Securities
Warrants
Collateralized Loans
Levered Equity and Risky Debt
16.4 Exotic Options
Asian Options
Binary Options
Summary
Currency-Translated Options
Lookback Options
Barrier Options
17.1 Option Valuation:Introduction
Intrinsic and Time Values
Dererminants of Option Values
Option Valuation
17.2 Binomial Option Pricing
TWo-State Option Pricing
Generalizing the Two-State Approach
17.3 Black-Scholes Option Valuation
The Black-Scholes Foemula
Put Option Valuation
17.4 Using the Black-Scholes Formula
Hedge Ratios and the Black-ScholesFormula
Portfolio Insurance
17.5 Empirical Evidence
Summary
Futures Markets
18.1 The Futures Contract
The Basics of Futures Contracts
Existing Contracts
18.2 Mechanics of Trading in FuturesMarkets
The Clearinghouse and Open Interest
Marking to Market and the MarginAccount
Cash versus Actual Delivery
Hedging and Speculation
Basis Risk and Hedging
18.3 Futures Market Strategies
Regulations
Taxation
18.4 The Determination of Futures Prices
The Spot-Futures Parity Theorem
Spreads
18.5 Financial Futures
Stock Index Futures
Creating Synthetic Stock Positions
Index Arbitrage and the Triple-WitchingHour
Foreign Exchange Futures
Interest Rate Futures
Summary
PART SIXACTIVE INVESTMNT MANAGEMENT
Performance Evaluation
19.1 Risk-Adjusted Returns
Comparison Groups
Risk Adjustments
Risk Adjustments with Changing PortfolioComposition
19.2 Market Timing
19.3 Performance Attribution Procedures
Asset Allocation Decisions
Sector and Security Selection Decisions
Summing Up Component Contributions
Summary
International Diversification
20.1 Intemational Investments
The World Market Portfolio
International Diversification
Exchange Rate Risk
Passive and Active InternationalInvesting
Factor Models and InternationalInvesting
Equilibrium in International CapitalMarkets
Summary
Appendix A Investments in Nontraditional AssetGroups
Real Estate
Precious Metals
Other Nontraditional Assets
Active Portfolio Management
21.1 The Lure of Active Management
21.2 Objectives of Active Portfolios
21.3 Market Timing
The Value of Imperfect Forecasting
Valuing Market Timing as an Option
21.4 Security Selection:The Treynor-BlackModel
Overview of the Treynor-Black Model
Portfolio Construction
21.5 Multifactor Models and Active PortfolioManagement
Summary
APPENDIXESA Sources of Financial and EconomicInformation
B References
C Mathematical Tables
D References to CFA Questions
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