TY - BOOK AU - Bodie,Zvi AU - Kane,Alex AU - Marcus,Alan J. TI - Investments T2 - McGraw-Hill/Irwin series in finance, insurance, and real estate SN - 0073530611 (alk. paper) AV - HG4521 .B564 2008 U1 - 332.6 22 PY - 2008/// CY - Boston PB - McGraw-Hill / Irwin KW - Investments KW - Portfolio management N1 - Includes bibliographical references and index; C O N T E N T S PART ONE 1 INTRODUCTION CHAPTER 1 3 THE INVESTMENT ENVIRONMENT 1.1 Real Assets versus Financial Assets 4 1.2 Financial Markets and the Economy 6 Consumption Timing 6 Allocation of Risk 6 Separation of Ownership and Management 7 A Crisis in Corporate Governance 8 Accounting Scandals 8 Analyst Scandals 10 Initial Public Offerings 11 1.3 Clients of the Financial System 11 The Household Sector 12 The Business Sector 12 The Government Sector 13 1.4 The Environment Responds to Clientele Demands 14 Financial Intermediation 14 Investment Banking 16 Financial Innovation and Derivatives 17 Response to Taxation and Regulation 18 1.5 Markets and Market Structure 20 1.6 Ongoing Trends 21 Globalization 21 Securitization 22 Financial Engineering 24 Computer Networks 25 Summary 25 Key Terms 26 Websites 26 Problems 27 Standard and Poor?s 29 E- Investments: Track Your Portfolio 29 Solutions to Concept Checks 30 CHAPTER 2 31 FINANCIAL INSTRUMENTS 2.1 The Money Market 32 Treasury Bills 32 Certificates of Deposit 33 Commercial Paper 33 Bankers? Acceptances 33 Eurodollars 34 Repos and Reverses 34 Federal Funds 34 Brokers? Calls 35 The LIBOR Market 35 Yields on Money Market Instruments 35 2.2 The Bond Market 35 Treasury Notes and Bonds 36 Federal Agency Debt 36 International Bonds 38 Municipal Bonds 39 Corporate Bonds 41 Mortgages and Mortgage-Backed Securities 42 2.3 Equity Securities 44 Common Stocks as Ownership Shares 44 Characteristics of Common Stock 45 Stock Market Listings 46 Preferred Stock 47 2.4 Stock and Bond Market Indexes 47 Stock Market Indexes 47 Dow Jones Averages 48 Standard & Poor?s Indexes 51 Other U.S. Market-Value Indexes 52 Equally Weighted Indexes 52 Foreign and International Stock Market Indexes 53 Bond Market Indicators 53 2.5 Derivative Markets 54 Options 54 Futures Contracts 57 Summary 58 Key Terms 59 Websites 59 Problems 60 Standard and Poor?s 63 E- Investments: Security Prices and Returns 63 Solutions to Concept Checks 63 CHAPTER 3 65 HOW SECURITIES ARE TRADED 3.1 How Firms Issue Securities 66 Investment Bankers and Underwriting 66 Shelf Registration 68 Private Placements 68 Initial Public Offerings 68 3.2 Where Securities Are Traded 71 The Secondary Markets 72 The Over-the-Counter Market 73 The Third and Fourth Markets 75 The National Market System 76 Bond Trading 77 3.3 Trading on Exchanges 77 The Participants 77 Types of Orders 78 Market Orders 78 Limit Orders 78 Specialists and the Execution of Trades 80 Block Sales 81 The SuperDOT System 82 Settlement 82 3.4 Trading on the OTC Market 82 Market Structure in Other Countries 84 London 84 Euronext 84 Tokyo 85 Globalization of Stock Markets 85 3.5 Trading Costs 86 3.6 Buying on Margin 88 3.7 Short Sales 91 3.8 Regulation of Securities Markets 94 Government Regulation 94 Regulatory Responses to Recent Scandals 95 Self-Regulation and Circuit Breakers 96 Insider Trading 98 Summary 99 Key Terms 100 Websites 100 Problems 101 Standard and Poor?s 105 E-Investments: Short Sales 105 Solutions to Concept Checks 105 CHAPTER 4 107 MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES 4.1 Investment Companies 108 4.2 Types of Investment Companies 109 Unit Investment Trusts 109 Managed Investment Companies 109 Other Investment Organizations 111 Commingled Funds 111 Real Estate Investment Trusts (REITS) 111 Hedge Funds 111 4.3 Mutual Funds 112 Investment Policies 112 Money Market Funds 112 Equity Funds 112 Bond Funds 113 International Funds 113 Balanced and Income Funds 113 Asset Allocation and Flexible Funds 113 Index Funds 113 How Funds Are Sold 115 4.4 Costs of Investing in Mutual Funds 116 Fee Structure 116 Front-End Load 116 Back-End Load 116 Operating Expenses 116 12b-1 Charges 116 Fees and Mutual Fund Returns 117 4.5 Taxation of Mutual Fund Income 119 4.6 Exchange-Traded Funds 120 4.7 Mutual Fund Investment Performance: A First Look 122 4.8 Information on Mutual Funds 125 Summary 129 Key Terms 129 Websites 130 Problems 131 Standard and Poor?s 133 E-Investments: Choosing a Mutual Fund 133 Solutions to Concept Checks 133 PART TWO 135 PORTFOLIO THEORY CHAPTER 5 137 HISTORY OF INTEREST RATES AND RISK PREMIUMS 5.1 Determinants of the Level of Interest Rates 138 Real and Nominal Rates of Interest 138 The Equilibrium Real Rate of Interest 139 The Equilibrium Nominal Rate of Interest 140 Bills and Inflation, 1963?2002 141 Taxes and the Real Rate of Interest 142 5.2 Risk and Risk Premiums 142 5.3 The Historical Record 144 Bills, Bonds, and Stocks, 1926?2002 144 5.4 Real Versus Nominal Risk 150 5.5 Return Distributions and Value at Risk 151 5.6 A Global View of the Historical Record 154 5.7 Forecasts for the Long Haul 154 Summary 156 Key Terms 157 Websites 157 Problems 158 Standard and Poor?s 162 E-Investments: Analytics Tutorial 162 Solutions to Concept Checks 162 Appendix: Continuous Compounding 162 CHAPTER 6 165 RISK AND RISK AVERSION 6.1 Risk and Risk Aversion 166 Risk with Simple Prospects 166 Risk, Speculation, and Gambling 167 Risk Aversion and Utility Values 168 6.2 Portfolio Risk 173 Asset Risk versus Portfolio Risk 173 A Review of Portfolio Mathematics 174 Rule 1 174 Rule 2 174 Rule 3 175 Rule 4 175 Rule 5 178 Summary 179 Key Terms 179 Websites 179 Problems 180 Standard and Poor?s 182 E-Investments: Risk and Return 182 Solutions to Concept Checks 182 Appendix A: A Defense of Mean-Variance Analysis 184 Appendix B: Risk Aversion, Expected Utility, and the St. Petersburg Paradox 191 CHAPTER 7 197 CAPITAL ALLOCATION BETWEEN THE RISKY ASSET AND THE RISK-FREE ASSET 7.1 Capital Allocation across Risky and Risk-Free Portfolios 198 7.2 The Risk-Free Asset 200 7.3 Portfolios of One Risky Asset and One Risk-Free Asset 201 7.4 Risk Tolerance and Asset Allocation 205 7.5 Passive Strategies: The Capital Market Line 210 Summary 214 Key Terms 214 Websites 215 Problems 215 Standard and Poor?s 219 E-Investments: The S&P 500 219 Solutions to Concept Checks 219 CHAPTER 8 223 OPTIMAL RISKY PORTFOLIOS 8.1 Diversification and Portfolio Risk 224 8.2 Portfolios of Two Risky Assets 225 8.3 Asset Allocation with Stocks, Bonds, and Bills 234 The Ultimate Risky Portfolio with Two Risky Assets and a Risk-Free Asset 235 8.4 The Markowitz Portfolio Selection Model 240 Security Selection 240 8.5 The Spreadsheet Model 246 Calculation of Expected Return and Variance 246 Capital Allocation and the Separation Property 251 Asset Allocation and Security Selection 253 8.6 Optimal Portfolios with Restrictions on the Risk-Free Asset 254 Summary 258 Key Terms 259 Websites 259 Problems 260 E-Investments: Risk Comparisons 266 Solutions to Concept Checks 266 Appendix A: The Power of Diversification 269 Appendix B: The Insurance Principle: Risk-sharing versus Risk-Pooling 272 Appendix C: The Fallacy of Time Diversification 274 PART THREE 279 EQUILIBRIUM IN CAPITAL MARKETS CHAPTER 9 281 THE CAPITAL ASSET PRICING MODEL 9.1 The Capital Asset Pricing Model 281 Why Do All Investors Hold the Market Portfolio? 283 The Passive Strategy Is Efficient 285 The Risk Premium of the Market Portfolio 285 Expected Returns on Individual Securities 286 The Security Market Line 289 9.2 Extensions of the CAPM 292 The CAPM with Restricted Borrowing: The Zero-Beta Model 293 Lifetime Consumption and the CAPM 297 9.3 The CAPM and Liquidity 297 Summary 303 Key Terms 304 Websites 304 Problems 304 Standard and Poor?s 309 E-Investments: Beta Comparisons 309 Solutions to Concept Checks 310 Appendix: Demand for Stocks and Equilibrium Prices 311 CHAPTER 10 317 INDEX MODELS 10.1 A Single-Index Security Market 318 Systematic Risk versus Firm-Specific Risk 318 Estimating the Index Model 321 The Index Model and Diversification 324 10.2 The CAPM and the Index Model 326 Actual Returns versus Expected Returns 326 The Index Model and Realized Returns 326 The Index Model and the Expected Return?Beta Relationship 327 10.3 The Industry Version of the Index Model 329 Predicting Betas 333 10.4 Index Models and Tracking Portfolios 334 Summary 336 Key Terms 336 Websites 336 Problems 336 Standard and Poor?s 340 E-Investments: Comparing Volatilities and Beta Coefficients 340 Solutions to Concept Checks 341 CHAPTER 11 343 ARBITRAGE PRICING THEORY AND MULTIFACTOR MODELS OF RISK AND RETURN 11.1 Multifactor Models: An Overview 344 Factor Models of Security Returns 344 A Multifactor Security Market Line 346 11.2 Arbitrage Pricing Theory 348 Arbitrage, Risk Arbitrage, and Equilibrium 349 Well-Diversified Portfolios 350 Beta and Expected Returns 351 The One-Factor Security Market Line 353 11.3 Individual Assets and the APT 355 The APT and the CAPM 356 11.4 A Multifactor APT 356 11.5 Where Should We Look for Factors? 358 11.6 A Multifactor CAPM 361 Summary 362 Key Terms 363 Websites 363 Problems 363 Standard and Poor?s 367 E-Investments: APT versus CAPM 368 Solutions to Concept Checks 368 CHAPTER 12 369 MARKET EFFICIENCY AND BEHAVIORAL FINANCE 12.1 Random Walks and the Efficient Market Hypothesis 370 Competition as the Source of Efficiency 372 Versions of the Efficient Market Hypothesis 373 12.2 Implications of the EMH 373 Technical Analysis 373 Fundamental Analysis 377 Active versus Passive Portfolio Management 378 The Role of Portfolio Management in an Efficient Market 380 Resource Allocation 380 12.3 Event Studies 381 12.4 Are Markets Efficient? 384 The Issues 384 The Magnitude Issue 384 The Selection Bias Issue 385 The Lucky Event Issue 385 Weak-Form Tests: Patterns in Stock Returns 386 Returns over Short Horizons 386 Returns over Long Horizons 387 Predictors of Broad Market Returns 388 Semistrong Tests: Market Anomalies 388 The Small-Firm-in-January effect 389 The Neglected-Firm Effect and Liquidity Effects 391 Book- to-Market Ratios 391 Post?Earnings-Announcement Price Drift 392 Strong-Form Tests: Inside Information 394 Interpreting the Evidence 394 Risk Premiums or Inefficiencies? 394 Anomalies or Data Mining? 396 12.5 A Behavioral Interpretation 396 Information Processing 397 Forecasting Errors 397 Overconfidence 397 Conservatism 398 Sample-Size Neglect and Representativeness 398 Behavioral Biases 398 Framing 398 Mental Accounting 398 Regret Avoidance 399 Limits to Arbitrage 399 Fundamental Risk 399 Implementation Costs 400 Model Risk 400 Evaluating the Behavioral Critique 400 12.6 Mutual Fund Performance 401 So, Are Markets Efficient? 405 Summary 405 Key Terms 406 Websites 406 Problems 407 Standard and Poor?s 413 E-Investments: Efficient Markets and Insider Trading 413 Solutions to Concept Checks 413 CHAPTER 13 415 EMPIRICAL EVIDENCE ON SECURITY RETURNS 13.1 The Index Model and the Single-Factor APT 416 The Expected Return?Beta Relationship 416 Setting Up the Sample Data 417 Estimating the SCL 417 Estimating the SML 417 Tests of the CAPM 418 The Market Index 419 Measurement Error in Beta 422 The EMH and the CAPM 424 Accounting for Human Capital and Cyclical Variations in Asset Betas 424 13.2 Tests of Multifactor CAPM and APT 426 A Macro Factor Model 426 13.3 The Fama-French Three-Factor Model 429 13.4 Time-Varying Volatility 432 13.5 The Equity Premium Puzzle 435 Expected versus Realized Returns 435 Survivorship Bias 437 13.6 Survivorship Bias and Tests of Market Efficiency 438 Summary 441 Key Terms 441 Websites 441 Problems 442 Standard and Poor?s 444 E-Investments: Portfolio Theory 444 Solutions to Concept Checks 444 PART FOUR 445 FIXED-INCOME SECURITIES CHAPTER 14 447 BOND PRICES AND YIELDS 14.1 Bond Characteristics 448 Treasury Bonds and Notes 448 Accrued Interest and Quoted Bond Prices 450 Corporate Bonds 450 Call Provisions on Corporate Bonds 451 Convertible Bonds 452 Puttable Bonds 452 Floating-Rate Bonds 452 Preferred Stock 452 Other Issuers 453 International Bonds 453 Innovation in the Bond Market 453 Inverse Floaters 454 Asset-Backed Bonds 454 Catastrophe Bonds 454 Indexed Bonds 454 14.2 Bond Pricing 455 Bond Pricing between Coupon Dates 458 14.3 Bond Yields 459 Yield to Maturity 459 Yield to Call 462 Realized Compound Yield versus Yield to Maturity 464 14.4 Bond Prices over Time 466 Yield to Maturity versus Holding-Period Return 468 Zero- Coupon Bonds 468 After-Tax Returns 469 14.5 Default Risk and Bond Pricing 471 Junk Bonds 471 Determinants of Bond Safety 471 Bond Indentures 474 Sinking Funds 474 Subordination of Further Debt 475 Dividend Restrictions 475 Collateral 476 Yield to Maturity and Default Risk 477 Summary 478 Key Terms 479 Websites 479 Problems 480 Standard and Poor?s 485 E-Investments: Credit Spreads 485 Solutions to Concept Checks 485 CHAPTER 15 487 THE TERM STRUCTURE OF INTEREST RATES 15.1 The Term Structure Under Certainty 488 Bond Pricing 488 Bond Stripping and Pricing of Coupon Bonds 491 Holding-Period Returns 492 Forward Rates 493 15.2 Interest Rate Uncertainty and Forward Rates 495 15.3 Theories of the Term Structure 497 The Expectations Hypothesis 497 Liquidity Preference 497 15.4 Interpreting the Term Structure 498 15.5 Forward Rates as Forward Contracts 503 15.6 Measuring the Term Structure 505 Summary 509 Key Terms 509 Websites 509 Problems 510 E- Investments: Expectations and Term Spreads 516 Solutions to Concept Checks 516 CHAPTER 16 519 MANAGING BOND PORTFOLIOS 16.1 Interest Rate Risk 520 Interest Rate Sensitivity 520 Duration 523 What Determines Duration? 527 Rule 1 for Duration 528 Rule 2 for Duration 528 Rule 3 for Duration 528 Rule 4 for Duration 529 Rule 5 for Duration 529 Rule 6 for Duration 530 Rule 7 for Duration 530 Rule 8 for Duration 530 16.2 Convexity 531 Why Do Investors Like Convexity? 534 Duration and Convexity of Callable Bonds 534 16.3 Passive Bond Management 536 Bond-Index Funds 537 Immunization 538 Cash Flow Matching and Dedication 546 Other Problems with Conventional Immunization 546 16.4 Active Bond Management 547 Sources of Potential Profit 547 Horizon Analysis 548 Contingent Immunization 549 16.5 Interest Rate Swaps 551 Swaps and Balance Sheet Restructuring 552 The Swap Dealer 552 16.6 Financial Engineering and Interest Rate Derivatives 553 Summary 555 Key Terms 556 Websites 556 Problems 557 Standard and Poor?s 566 E-Investments: Bond Calculations 566 Solutions to Concept Checks 566 PART FIVE 569 SECURITY ANALYSIS CHAPTER 17 571 MACROECONOMIC AND INDUSTRY ANALYSIS 17.1 The Global Economy 572 17.2 The Domestic Economy 574 17.3 Demand and Supply Shocks 576 17.4 Federal Government Policy 576 Fiscal Policy 577 Monetary Policy 578 Supply- Side Policies 579 17.5 Business Cycles 579 The Business Cycle 579 Economic Indicators 581 17.6 Industry Analysis 585 Defining an Industry 586 Sensitivity to the Business Cycle 587 Sector Rotation 590 Industry Life Cycles 591 Start-Up Stage 592 Consolidation Stage 592 Maturity Stage 592 Relative Decline 593 Industry Structure and Performance 594 Threat of Entry 594 Rivalry between Existing Competitors 594 Pressure from Substitute Products 594 Bargaining Power of Buyers 594 Bargaining Power of Suppliers 595 Summary 595 Key Terms 595 Websites 595 Problems 596 Standard and Poor?s 602 E-Investments: The Macroeconomy 602 Solutions to Concept Checks 602 CHAPTER 18 605 EQUITY VALUATION MODELS 18.1 Valuation by Companies 606 Limitations of Book Value 607 18.2 Intrinsic Value versus Market Price 608 18.3 Dividend Discount Models 609 The Constant-Growth DDM 611 Convergence of Price to Intrinsic Value 614 Stock Prices and Investment Opportunities 615 Life Cycles and Multistage Growth Models 618 Multistage Growth Models 622 18.4 Price-Earnings Ratio 622 The Price-Earnings Ratio and Growth Opportunities 622 P/E Ratios and Stock Risk 626 Pitfalls in P/E Analysis 627 Combining P/E Analysis and the DDM 631 Other Comparative Valuation Ratios 632 Price-to-Book Ratio 632 Price-to-Cash-Flow Ratio 632 Price-to-Sales Ratio 633 18.5 Corporate Finance and the Free Cash Flow Approach 634 18.6 Inflation and Equity Valuation 636 18.7 The Aggregate Stock Market 639 Explaining Past Behavior 639 Forecasting the Stock Market 640 PART SIX 695 OPTIONS, FUTURES, AND OTHER DERIVATIVES CHAPTER 20 697 OPTIONS MARKETS: INTRODUCTION 20.1 The Option Contract 698 Options Trading 700 American and European Options 702 Adjustments in Option Contract Terms 702 The Option Clearing Corporation 702 Other Listed Options 703 Index Options 703 Futures Options 705 Foreign Currency Options 705 Interest Rate Options 705 20.2 Values of Options at Expiration 705 Call Options 705 Put Options 707 Option versus Stock Investments 709 20.3 Option Strategies 711 Protective Put 711 Covered Calls 713 Straddle 715 Spreads 716 Collars 716 20.4 The Put-Call Parity Relationship 719 20.5 Optionlike Securities 721 Callable Bonds 721 Convertible Securities 723 Warrants 725 Collateralized Loans 726 Levered Equity and Risky Debt 727 20.6 Financial Engineering 728 20.7 Exotic Options 731 Asian Options 731 Barrier Options 731 Lookback Options 731 Currency-Traded Options 731 Binary Options 732 Summary 732 Key Terms 732 Websites 732 Problems 733 Standard and Poor?s 740 E-Investments: Options and Straddles 740 Solutions to Concept Checks 740 Summary 642 Key Terms 643 Websites 643 Problems 644 Standard and Poor?s 651 E- Investments: Equity Valuation 652 Solutions to Concept Checks 652 CHAPTER 19 655 FINANCIAL STATEMENT ANALYSIS 19.1 The Major Financial Statements 656 The Income Statement 656 The Balance Sheet 657 The Statement of Cash Flows 658 19.2 Accounting versus Economic Earnings 659 19.3 Return on Equity 660 Past versus Future ROE 661 Financial Leverage and ROE 662 19.4 Ratio Analysis 664 Decomposition of ROE 664 Turnover and Other Asset Utilization Ratios 665 Liquidity and Coverage Ratios 667 Market Price Ratios 667 Choosing a Benchmark 670 19.5 Economic Value Added 671 19.6 An Illustration of Financial Statement Analysis 672 19.7 Comparability Problems 674 Inventory Valuation 674 Depreciation 675 Inflation and Interest Expense 676 Quality of Earnings 676 International Accounting Conventions 679 19.8 Value Investing: The Graham Technique 680 Summary 681 Key Terms 682 Websites 682 Problems 683 Standard and Poor?s 692 E-Investments: Financial Statement Analysis 693 Solutions to Concept Checks 693 CHAPTER 21 745 OPTION VALUATION 21.1 Option Valuation: Introduction 746 Intrinsic and Time Values 746 Determinants of Option Values 747 21.2 Restrictions on Option Values 748 Restrictions on the Value of a Call Option 749 Early Exercise and Dividends 751 Early Exercise of American Puts 751 21.3 Binomial Option Pricing 752 Two-State Option Pricing 752 Generalizing the Two-State Approach 755 21.4 Black-Scholes Option Valuation 758 The Black-Scholes Formula 759 Dividends and Call Option Valuation 765 Put Option Valuation 766 21.5 Using the Black-Scholes Formula 767 Hedge Ratios and the Black-Scholes Formula 767 Portfolio Insurance 770 Hedging Bets on Mispriced Options 774 21.6 Empirical Evidence on Option Pricing 778 Summary 779 Key Terms 780 Websites 780 Problems 781 Standard and Poor?s 787 E-Investments: Black-Scholes Option Pricing 788 Solutions to Concept Checks 788 CHAPTER 22 791 FUTURES MARKETS 22.1 The Futures Contract 792 The Basics of Futures Contracts 792 Existing Contracts 796 22.2 Mechanics of Trading in Futures Markets 796 The Clearinghouse and Open Interest 796 Marking to Market and the Margin Account 799 Cash versus Actual Delivery 801 Regulations 802 Taxation 802 22.3 Futures Markets Strategies 802 Hedging and Speculation 802 Basis Risk and Hedging 805 22.4 The Determination of Futures Prices 806 The Spot-Futures Parity Theorem 806 Spreads 809 Forward versus Futures Pricing 810 22.5 Futures Prices versus Expected Spot Prices 811 Expectation Hypothesis 811 Normal Backwardation 812 Contango 812 Modern Portfolio Theory 812 Summary 813 Key Terms 814 Websites 814 Problems 815 Standard and Poor?s 817 E- Investments: Contract Specifications for Financial Futures and Options 818 Solutions to Concept Checks 818 CHAPTER 23 821 FUTURES AND SWAPS: A CLOSER LOOK 23.1 Foreign Exchange Futures 822 The Markets 822 Interest Rate Parity 822 Direct versus Indirect Quotes 826 Using Futures to Manage Exchange Rate Risk 826 23.2 Stock Index Futures 829 The Contracts 829 Creating Synthetic Stock Positions: An Asset Allocation Tool 830 Empirical Evidence on Pricing of Stock-Index Futures 832 Index Arbitrage and the Triple- Witching Hour 834 Using Index Futures to Hedge Market Risk 835 23.3 Interest Rate Futures 837 Hedging Interest Rate Risk 837 Other Interest Rate Futures 839 23.4 Commodity Futures Pricing 840 Pricing with Storage Costs 840 Discounted Cash Flow Analysis for Commodity Futures 843 23.5 Swaps 844 Swap Pricing 846 Credit Risk in the Swap Market 847 Swap Variations 848 Summary 849 Key Terms 850 Websites 850 Problems 851 Standard and Poor?s 856 E- Investments: Describing Different Swaps 856 Solutions to Concept Checks 857 PART SEVEN 859 ACTIVE PORTFOLIO MANAGEMENT CHAPTER 24 861 PORTFOLIO PERFORMANCE EVALUATION 24.1 Measuring Investment Returns 862 Time-Weighted Returns versus Dollar- Weighted Returns 862 Arithmetic versus Geometric Averages 863 24.2 The Conventional Theory of Performance Evaluation 866 The M2 Measure of Performance (M 2) 869 Sharpe?s Measure as the Criterion for Overall Portfolios 870 Appropriate Performance Measures in Three Sections 871 Jane?s Portfolio Represents Her Entire Risky Investment Fund 871 Jane?s Portfolio Is an Active Portfolio and Is Mixed with a Passive Market Index 872 Jane?s Choice Portfolio Is One of Many Portfolios Combined into a Large Investment Fund 872 Relationships among the Various Performance Measures 874 Actual Performance Measurement: An Example 875 Realized Returns versus Expected Returns 875 24.3 Performance Measurement with Changing Portfolio Composition 877 24.4 Market Timing 879 24.5 Performance Attribution Procedures 881 Asset Allocation Decisions 883 Sector and Security Selection Decisions 884 Summing Up Component Contributions 885 24.6 Style Analysis 886 24.7 Morningstar?s Risk-Adjusted Rating 889 24.8 Evaluating Performance Evaluation 890 Summary 892 Key Terms 893 Websites 893 Problems 894 Standard and Poor?s 901 E-Investments: Performance of Mutual Funds 902 Solutions to Concept Checks 902 CHAPTER 25 905 INTERNATIONAL DIVERSIFICATION 25.1 Global Markets for Equities 906 Developed Countries 906 Emerging Markets 906 Market Capitalization and GDP 908 Home-Country Bias 910 25.2 Risk Factors in International Investing 910 Exchange Rate Risk 910 Country- Specific Risk 914 25.3 International Investing: Risk, Return, and Benefits from Diversification 917 Risk and Return: Summary Statistics 918 Are Investments in Emerging Markets Riskier? 918 Are Average Returns in Emerging Markets Greater? 918 Is Exchange Rate Risk Important in International Portfolios? 920 Benefits from International Diversification 921 Misleading Representation of Diversification Benefits 922 Realistic Benefits from International Diversification 925 Are Benefits from International Diversification Preserved in Bear Markets? 927 25.4 International Investing and Performance Attribution 927 Constructing a Benchmark Portfolio of Foreign Assets 928 Performance Attribution 929 Summary 932 Key Terms 932 Websites 933 Problems 933 Standard and Poor?s 937 E-Investments: International Diversification 937 Solutions to Concept Checks 937 CHAPTER 26 939 THE PROCESS OF PORTFOLIO MANAGEMENT 26.1 Making Investment Decisions 940 Objectives 940 Individual Investors 942 Personal Trusts 942 Mutual Funds 942 Pension Funds 942 Endowment Funds 942 Life Insurance Companies 942 Non?Life Insurance Companies 943 Banks 943 26.2 Constraints 943 Liquidity 944 Investment Horizon 944 Regulations 944 Tax Considerations 944 Unique Needs 944 26.3 Asset Allocation 946 Policy Statements 947 Taxes and Asset Allocation 947 26.4 Managing Portfolios of Individual Investors 948 Human Capital and Insurance 948 Investment in Residence 949 Saving for Retirement and the Assumption of Risk 949 Retirement Planning Models 950 Manage Your Own Portfolio or Rely on Others? 950 Tax Sheltering 952 The Tax-Deferral Option 952 Tax-Deferred Retirement Plans 953 Deferred Annuities 953 Variable and Universal Life Insurance 954 26.5 Pension Funds 955 Defined Contribution Plans 955 Defined Benefit Plans 956 Alternative Perspectives on Defined Benefit Pension Obligations 956 Pension Investment Strategies 957 Investing in Equities 958 Wrong Reasons to Invest in Equities 959 26.6 Future Trends in Portfolio Management 960 Summary 961 Key Terms 962 Websites 962 Problems 963 E-Investments: Personal Diversification 973 Solutions to Concept Checks 973 Appendix: A Spreadsheet Model for Long-Term Investing 974 CHAPTER 27 981 THE THEORY OF ACTIVE PORTFOLIO MANAGEMENT 27.1 The Lure of Active Management 982 27.2 Objectives of Active Portfolios 983 27.3 Market Timing 984 Valuing Market Timing as an Option 986 The Value of Imperfect Forecasting 987 27.4 Security Selection: The Treynor-Black Model 988 Overview of the Treynor-Black Model 988 Portfolio Construction 989 27.5 Multifactor Models and Active Portfolio Management 995 27.6 Imperfect Forecasts of Alpha Values and the Use of the Treynor-Black Model in Industry 996 Summary 998 Key Terms 999 Problems 999 Solutions to Concept Checks 1002 APPENDIX A 1005 Quantitative Review APPENDIX B 1043 References to CFA Questions APPENDIX C 1047 Glossary NAME INDEX 1061 SUBJECT INDEX 1065; 300-399 UR - http://www.loc.gov/catdir/toc/ecip0618/2006024754.html ER -