Investments: Principles and Concepts

Cover
Title Page
Copyright
Contents
Preface
Organization Of The Text
Special Features
Changes In The Twelfth Edition
Supplements
Acknowledgments
Part One: Background
1: Investing is an Important Activity Worldwide
An Overall Perspective on Investing
Establishing a Framework for Investing
Some Definitions
A Perspective on Investing
Why Do We Invest?
Take a Portfolio Perspective
The Importance of Studying Investments
The Personal Aspects
Investments as a Profession
Understanding the Investment Decision Process
The Basis of Investment Decisions—Return and Risk
Checking Your Understanding
Structuring the Decision Process
Important Considerations in the Investment Decision Process for Today's Investors
The Great Unknown
A Global Perspective
The Importance of the Internet
Individual Investors vs. Institutional Investors
Ethics in Investing
Checking Your Understanding
Organizing the Text
Summary
2: Investment Alternatives: Generic Principles All Investors Must Know
Organizing Financial Assets
Direct Investing
A Global Perspective
Nonmarketable Financial Assets
Money Market Securities
The Treasury Bill
Money Market Rates
Checking Your Understanding
Capital Market Securities
Fixed-Income Securities
Bonds
Types of Bonds
Government Agency Securities
Asset-Backed Securities
Rates on Fixed-Income Securities
Checking Your Understanding
Equity Securities
Preferred Stock
Common Stock
Investing Internationally in Equities
Checking Your Understanding
Derivative Securities
Options
Futures Contracts
A Final Note
Summary
3: Indirect Investing: A Global Activity
Investing Indirectly
What is an Investment Company?
How Important Are Investment Companies to Investors?
Three Major Types of Investment Companies
Closed-End Investment Companies
Exchange Traded Funds (ETFs)
Mutual Funds (Open-End Investment Companies)
Checking Your Understanding
Types of Mutual Funds
Money Market Funds
Equity Funds, Bond Funds, and Hybrid Funds
Checking Your Understanding
The Net Asset Value Per Share
The Details of Indirect Investing
Closed-End Funds
Mutual Funds
Exchange Traded Funds
Checking Your Understanding
Investment Company Performance
Measures of Fund Performance
Morningstar Ratings
Benchmarks
How Important are Expenses in Affecting Performance?
Some Conclusions about Fund Performance
Investing Internationally Through Investment Companies
Fund Categories For International Investing
The Future of Indirect Investing
Fund Supermarkets
Hedge Funds
Summary
4: Securities Markets Matter to All Investors
The Importance of Financial Markets
The Primary Markets
Initial Public Offerings (IPOs)
The Investment Banker
A Global Perspective
Checking Your Understanding
The Secondary Markets
U.S. Securities Markets for the Trading of Equities
The New York Stock Exchange
The NASDAQ Stock Market
NYSE vs. NASDAQ
The Over-The-Counter (OTC) Market
BATS
Electronic Communication Networks (ECNs)
Foreign Markets
Checking Your Understanding
Stock Market Indexes
The Dow Jones Averages
Standard & Poor's Stock Price Indexes
Understanding a Capitalization-Weighted Index
NASDAQ Indexes
Other Indexes
Using the Correct Domestic Stock Indexes
Foreign Stock Market Indicators
Checking Your Understanding
Bond Markets
Individual Investors and Bond Trading
Derivatives Markets
The Globalization of Markets
Summary
5: All Financial Markets Have Regulations and Trading Practices
Introduction
Brokerage Transactions
Brokerage Firms
Brokerage Accounts
How Orders Work
Trading on Today's Exchanges
Orders in the NASDAQ Stock Market
Modern Day Trading
Types of Orders
Clearing Procedures
Checking Your Understanding
Investor Protection in The Securities Markets
Government Regulation
Self-Regulation
Other Investor Protections
Checking Your Understanding
Margin
How Margin Accounts Can Be Used
Margin Requirements And Obligations
Margin Requirements on Other Securities
Some Misconceptions About Margin
Short Sales
Selling Short as an Investor
Checking Your Understanding
Summary
Part Two: Portfolio and Capital Market Theory
6: Return and Risk: The Foundation of Investing Worldwide
An Overview
Return
The Two Components of Asset Returns
Measuring Returns
Total Return
Return Relative
Cumulative Wealth Index
A Global Perspective
International Returns and Currency Risk
Checking Your Understanding
Summary Statistics for Returns
Arithmetic Mean
Geometric Mean
Arithmetic Mean Versus Geometric Mean
Inflation-Adjusted Returns
Checking Your Understanding
Risk
Sources of Risk
Measuring Risk
Variance and Standard Deviation
Risk Premiums
Checking Your Understanding
Realized Returns and Risks From Investing
Total Returns and Standard Deviations for the Major Financial Assets
Cumulative Wealth Indexes
Understanding Cumulative Wealth as Investors
Compounding and Discounting
Summary
7: Portfolio Theory is Universal
Dealing With Uncertainty
Using Probabilities
Probability Distributions
Calculating Expected Return for a Security
Calculating Risk for a Security
Checking Your Understanding
Introduction to Modern Portfolio Theory
Portfolio Return and Risk
Portfolio Expected Return
Portfolio Risk
Analyzing Portfolio Risk
Risk Reduction—The Insurance Principle
Diversification
Checking Your Understanding
The Components of Portfolio Risk
The Correlation Coefficient
Checking Your Understanding
Covariance
Relating the Correlation Coefficient and the Covariance
Calculating Portfolio Risk
The Two-Security Case
The n-Security Case
Checking Your Understanding
Obtaining the Data
Simplifying the Markowitz Calculations
Summary
8: Portfolio Selection for All Investors
Building a Portfolio using Markowitz Principles
Identify Optimal Risk-Return Combinations
The Attainable Set of Portfolios
Selecting an Optimal Portfolio of Risky Assets
The Global Perspective—International Diversification
Some Important Conclusions about the Markowitz Model
Checking Your Understanding
Alternative Methods of Obtaining the Efficient Frontier
Selecting Optimal Asset Classes—The Asset Allocation Decision
Asset Allocation and Diversification
Some Major Asset Classes
Combining Asset Classes
Asset Classes and Correlation Coefficients
Asset Allocation and the Individual Investor
Asset Allocation and Index Mutual Funds
Life Cycle Analysis
Other Approaches
Checking Your Understanding
The Impact of Diversification on Risk
Systematic and Nonsystematic Risk
How Many Securities are Needed to Fully Diversify?
The Implications of Reducing Risk by Holding Portfolios
Summary
9: Asset Pricing Principles
Capital Market Theory
Capital Market Theory Assumptions
Introduction of The Risk-Free Asset
Risk-Free Borrowing and Lending
Checking Your Understanding
The Equilibrium Return-Risk Tradeoff
The Capital Market Line
Checking Your Understanding
The Security Market Line
Checking Your Understanding
Estimating the SML
Estimating Beta
Tests of the CAPM
Arbitrage Pricing Theory
The Law of One Price
Assumptions of APT
Factor Models
Understanding the APT Model
Identifying the Factors
Using APT in Investment Decisions
Checking Your Understanding
Some Conclusions about Asset Pricing
Summary
Part Three: Common Stocks: Analysis, Valuation, and Management
10: Common Stock Valuation Lessons for All Investors
Overview
Discounted Cash Flow Models
Two DCF Approaches
The Dividend Discount Model
Applying the DDM
The DDM Equation
Implementing the DDM
Estimating Future Dividends
Checking Your Understanding
Growth Rate Cases for the DDM
The Zero Growth Rate Model
The Constant Growth Rate Model
How k and g Affect Value
The Multiple Growth Rate Model
Dividends, Dividends—What About Capital Gains?
The Dividend Discount Model in Practice
Checking Your Understanding
Other Discounted Cash Flow Approaches
Free Cash Flow to Equity
Free Cash Flow to the Firm
Intrinsic Value and Market Price
Checking Your Understanding
The Earnings Multiplier Approach
Relative Valuation Metrics
The Price/Earnings Ratio
Price/Book Value
Price/Sales Ratio (PSR)
Economic Value Added Analysis
Which Approach To Use?
Bursting the Bubble on New Economy Stocks—A Lesson in Valuation
Checking Your Understanding
Some Final Thoughts on Valuation
Summary
11: Managing a Stock Portfolio: A Worldwide Issue
A Global Perspective
The Impact of the Overall Market on Stocks
Building Stock Portfolios
Checking Your Understanding
The Passive Strategy
Buy-and-Hold Strategy
Index Funds
Checking Your Understanding
The Active Strategy
Security Selection
Sector Rotation
Market Timing
Checking Your Understanding
Rational Markets and Active Strategies
A Simple Strategy—The Coffeehouse Portfolio
Summary
12: What Happens If Markets Are Efficient Or Not?
Overview
The Concept of an Efficient Market
What Is an Efficient Market?
Why the U.S. Stock Market Can Be Expected to Be Efficient
The International Perspective
Forms of Market Efficiency
Checking Your Understanding
How to Test for Market Efficiency
Weak-Form Tests
Semistrong-Form Tests
Strong-Form Evidence
Checking Your Understanding
Market Anomalies
Earnings Announcements
Low P/E Ratios
The Size Effect
The January Effect
The Value Line Ranking System
Other Anomalies
Data Mining
Checking Your Understanding
Behavioral Finance
Efficient Markets vs. Behavioral Finance
Behavioral Finance Implications for Investors
Behavioral Finance Today
Checking Your Understanding
Some Conclusions About Market Efficiency
Summary
Part Four: Security Analysis
13: Economy/Market Analysis Must Be Considered By All Investors
Introduction
Taking a Global Perspective
Assessing the Economy
The Business Cycle
Forecasts of the Economy
Checking Your Understanding
The Stock Market and the Economy
The Economy and Stock Market Booms
Economic Slowdowns and Bear Markets
Relating the Bond Market and Interest Rates to the Stock Market
Checking Your Understanding
Understanding the Stock Market
What Determinants Aggregate Stock Prices?
Checking Your Understanding
Making Market Forecasts
Focus on the Important Variables
Checking Your Understanding
Using the Business Cycle to Make Market Forecasts
The E/P Ratio and the Treasury Bond Yield
Other Approaches to Assessing the Market's Likely Direction
Summary
14: Sector/Industry Analysis
Introduction
What Is An Industry?
Classifying Industries
The NAICS Classification System
Other Industry Classifications
The Importance Of Sector/Industry Analysis
Why Sector/Industry Analysis Is Important over the Long Run
Checking Your Understanding
Industry Performance over Shorter Periods
How One Industry Can Have a Major Impact on Investors—the Telecom Industry
Cross-Sectional Volatility Has Increased
Analyzing Sectors/Industries
The Industry Life Cycle
Checking Your Understanding
Qualitative Aspects of Industry Analysis
Using Sector/Industry Analysis As An Investor
Assess the Business Cycle
Review Investment Advisory Services About Industries
Sector Rotation
Evaluating Future Industry Prospects
Summary
15: Company Analysis
Fundamental Analysis
The Accounting Aspects of Earnings
The Financial Statements
Checking Your Understanding
The Problems with EPS
Has the Situation Improved?
Checking Your Understanding
Using the Financial Statements to Analyze a Company's ROE and EPS
Analyzing Return on Assets (ROA)
Analyzing Return on Equity (ROE)
The Accounting Determinants of EPS
Estimating the Internal (Sustainable) Growth Rate
Checking Your Understanding
Earnings Estimates
A Forecast of EPS
The Accuracy of Earnings Forecasts
Earnings Surprises
Earnings Guidance
The Earnings Game
Useful Information for Investors About Earnings Estimates
Sales Growth—an Alternative to Earnings
The P/E Ratio
Which P/E Ratio Is Being Used?
Determinants of the P/E Ratio
Why P/E Ratios Vary Among Companies
The PEG Ratio
Fundamental Security Analysis in Practice
Summary
16: Technical Analysis
Introduction
What is Technical Analysis?
A Framework for Technical Analysis
Checking Your Understanding
Stock Price and Volume Techniques
The Dow Theory
Charts of Price Patterns
Checking Your Understanding
Moving Averages
Relative Strength
Using the Computer for Technical Analysis
Technical Indicators
Breadth Indicators
Sentiment Indicators
Testing Technical Analysis Strategies
The Ebb and Flow of Technical Analysis
Some Conclusions about Technical Analysis
Summary
Part Five: Fixed-Income Securities: Analysis, Valuation, and Management
17: Fixed Income Securities Are Available Worldwide
Introduction
Bond Yields and Interest Rates
The Basic Components of Interest Rates
The Term Structure of Interest Rates
Risk Premiums (Yield Spreads)
Measuring Bond Yields
Current Yield
Yield to Maturity
Yield to First Call
Realized Compound Yield
Checking Your Understanding
Checking Your Understanding
Bond Prices
The Valuation Principle
Bond Valuation
Bond Price Changes
Bond Price Changes Over Time
Bond Price Changes as a Result of Interest Rate Changes
Checking Your Understanding
Summary
18: Managing Bond Portfolios: Some Issues Affect All Investors
Why Buy Bonds?
Buying Foreign Bonds
Important Considerations in Managing a Bond Portfolio
Understanding the Bond Market
Global Factors and the U.S. Bond Markets
Checking Your Understanding
Bond Strategies and Techniques
Passive Management Strategies
Buy and Hold
Indexing
Active Management Strategies
Forecasting Changes in Interest Rates
Yield Spread Analysis
Identifying Mispricing Among Bonds
New Tools for Individual Investors
Managing Price Volatility
Duration
Checking Your Understanding
Managing Price Volatility
Immunization
Summary
Part Six: Derivative Securities
19: Understanding Derivative Securities: Options
Why Have Derivative Securities?
Why Options Markets?
Introduction to Options
Long-Term Options
WeeklysSM Options
Understanding Options
Options Terminology
Checking Your Understanding
How Options Work
The Mechanics of Trading
Checking Your Understanding
Payoffs and Profits from Basic Option Positions
Calls
Puts
Some Basic Options Strategies
Covered Calls
Protective Puts
Portfolio Insurance
Checking Your Understanding
Option Valuation
A General Framework
Intrinsic Values and Time Values
Boundaries on Options Prices
The Black-Scholes Model
Put Option Valuation
Summarizing the Factors Affecting Options Prices
Hedge Ratios
Using the Black Scholes Model
Checking Your Understanding
An Investor's Perspective on Puts and Calls
What Puts and Calls Mean to Investors
The Evolutionary Use of Options
Stock-Index Options
The Basics of Stock-Index Options
Strategies with Stock-Index Options
The Popularity of Stock-Index Options
Summary
20: Understanding Derivative Securities: Futures
An Overview of Futures Markets
Why Futures Markets?
What Is Traded in the Futures Markets?
The Structure of Futures Markets
U.S. Futures Exchanges
Foreign Futures Markets
The Clearinghouse
Checking Your Understanding
The Mechanics of Trading
Futures Contracts
Basic Procedures
Margin
Checking Your Understanding
Using Futures Contracts
Hedgers
How to Hedge with Futures
Speculators
Calculating the Rate of Return on Futures Contracts
Checking Your Understanding
Financial Futures
Foreign Currency Futures
Interest Rate Futures
Stock-Index Futures
Single Stock Futures
Summary
Part Seven: Investment Management
21: All Investors Must Consider Portfolio Management
A Perspective on Investing in Financial Assets
Managing Your Financial Assets
Individual Investors Vary Widely
Checking Your Understanding
Formulate an Appropriate Investment Strategy
Investor Objectives
Establishing Your Return Expectations
Assessing Your Risk Tolerance
Checking Your Understanding
What Issues Do Investors Face in Their Financial Planning?
Liquidity Needs
Time Horizon
Tax Considerations
Regulations
Unique Individual Circumstances
Investor Expectations as a Part of Financial Planning
Rate of Return Assumptions
Checking Your Understanding
Implementing Investing Strategies
Asset Allocation
Portfolio Optimization
Financial Planning on an Ongoing Basis
Tax-Advantaged Investing
Monitoring Market Conditions
Checking Your Understanding
Rebalancing a Portfolio of Financial Assets
Determining the Success of Your Financial Planning
Minimize Costs and Effort, and Improve Performance When Managing a Portfolio of Financial Assets
Summary
22: Evaluation of Investment Performance: A Global Concept
A Framework for Evaluating and Assessing Portfolio Performance
Performance Measurement Issues
Three Questions to Answer in Measuring Portfolio Performance
Return Calculations
Risk Considerations
Checking Your Understanding
Performance Benchmarks and Performance Universes
Performance Universes
Performance Benchmarks
A Straightforward Approach to Performance Evaluation
Risk-adjusted Measures of Performance
The Sharpe Ratio
Treynor's Reward to Volatility
Checking Your Understanding
Jensen's Alpha
M2
Using the Sharpe Ratio Today
Checking Your Understanding
Style Analysis and Performance Attribution
Style Analysis
Performance Attribution
Money Managers and Performance Presentations
Checking Your Understanding
An Overview on Performance Evaluation
Summary
Glossary
Index