Investment Analysis & Portfolio Management

Cover
Title page
Copyright page
Brief Contents
Contents
Preface
Acknowledgments
About the Authors
Part 1: The Investment Background
	Chapter 1: The Investment Setting
		What Is an Investment?
			Investment Defined
		Measures of Return and Risk
			Measures of Historical Rates of Return
			Computing Mean Historical Returns
			Calculating Expected Rates of Return
			Measuring the Risk of Expected Rates of Return
			Risk Measures for Historical Returns
		Determinants of Required Rates of Return
			The Real Risk-Free Rate
			Factors Influencing the Nominal Risk-Free Rate (NRFR)
			Risk Premium
			Risk Premium and Portfolio Theory
			Fundamental Risk versus Systematic Risk
			Summary of Required Rate of Return
		Relationship between Risk and Return
			Movements along the SML
			Changes in the Slope of the SML
			Changes in Capital Market Conditions or Expected Inflation
			Summary of Changes in the Required Rate of Return
		Chapter 1 Appendix: Computation of Variance and Standard
 Deviation
	Chapter 2: Asset Allocation and Security Selection
		Individual Investor Life Cycle
			The Preliminaries
			Investment Strategies over an Investor’s Lifetime
			Life Cycle Investment Goals
		The Portfolio Management Process
		The Need for a Policy Statement
			Understanding and Articulating Realistic Investor Goals
			Standards for Evaluating Portfolio Performance
			Other Benefits
		Input to the Policy Statement
			Investment Objectives
			Investment Constraints
		Constructing the Policy Statement
			General Guidelines
			Some Common Mistakes
		The Importance of Asset Allocation
			Investment Returns after Taxes and Inflation
			Returns and Risks of Different Asset Classes
			Asset Allocation Summary
		The Case for Global Investments
			Relative Size of U.S. Financial Markets
			Rates of Return on U.S. and Foreign Securities
			Risk of Diversified Country Investments
		Historical Risk-Returns on Alternative Investments
			World Portfolio Performance
			Art and Antiques
			Real Estate
		Chapter 2 Appendix:
			A. Covariance
			B. Correlation
	Chapter 3: Organization and Functioning of Securities  Markets
		What Is a Market?
			Characteristics of a Good Market
			Decimal Pricing
			Organization of the Securities Market
		Primary Capital Markets
			Government Bond Issues
			Municipal Bond Issues
			Corporate Bond Issues
			Corporate Stock Issues
			Private Placements and Rule 144A
		Secondary Financial Markets
			Why Secondary Markets Are Important
			Secondary Bond Markets
			Financial Futures
			Secondary Equity Markets
			Exchange Market-Makers
		Classification of U.S. Secondary Equity Markets
			Primary Listing Markets
			The Significant Transition of the U.S. Equity Markets
		Alternative Types of Orders Available
			Market Orders
			Limit Orders
			Special Orders
			Margin Transactions
			Short Sales
			Exchange Merger Mania
	Chapter 4: Security Market Indexes and Index Funds
		Uses of Security Market Indexes
		Differentiating Factors in Constructing Market
 Indexes
			The Sample
			Weighting Sample Members
			Computational Procedure
		Stock Market Indexes
			Price-Weighted Index
			Value-Weighted Index
			Unweighted Index
			Fundamental Weighted Index
			Style Indexes
			Global Equity Indexes
		Bond Market Indexes
			U.S. Investment-Grade Bond Indexes
			High-Yield Bond Indexes
			Global Government Bond Indexes
		Composite Stock–Bond Indexes
		Comparison of Indexes over Time
			Correlations between Monthly Equity Price Changes
			Correlations between Monthly Bond Index Returns
		Investing in Security Market Indexes
		Chapter 4 Appendix: Stock Market Indexes
Part 2: Developments in  Investment Theory
	Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
		Efficient Capital Markets
			Why Should Capital Markets Be Efficient?
			Alternative Efficient Market Hypotheses
			Tests and Results of Efficient Market Hypotheses
		Behavioral Finance
			Explaining Biases
			Fusion Investing
		Implications of Efficient Capital Markets
			Efficient Markets and Fundamental Analysis
			Efficient Markets and Portfolio Management
		Technical Analysis
			Underlying Assumptions of Technical Analysis
		Advantages of Technical Analysis
		Challenges to Technical Analysis
			Challenges to the Assumptions of Technical Analysis
			Challenges to Specific Trading Rules
		Technical Trading Rules and Indicators
			Contrary-Opinion Rules
			Follow the Smart Money
			Momentum Indicators
			Stock Price and Volume Techniques
			Efficient Markets and Technical Analysis
	Chapter 6: An Introduction to Portfolio Management
		Some Background Assumptions
			Risk Aversion
			Definition of Risk
		The Markowitz Portfolio Theory
			Alternative Measures of Risk
			Expected Rates of Return
			Variance (Standard Deviation) of Returns for an Individual Investment
			Variance (Standard Deviation) of Returns for a Portfolio
			Standard Deviation of a Portfolio
			A Three-Asset Portfolio
			Estimation Issues
		The Efficient Frontier
			The Efficient Frontier: An Example
			The Efficient Frontier and Investor Utility
		Capital Market Theory: An Overview
			Background for Capital Market Theory
			Developing the Capital Market Line
			Risk, Diversification, and the Market Portfolio
			Investing with the CML: An Example
		Chapter 6 Appendix:
			A. Proof That Minimum Portfolio Variance Occurs with Equal  Investment Weights When Securities Have Equal  Variance
			B. Derivation of Investment Weights That Will Give Zero
 Variance When Correlation Equals 
1.00
	Chapter 7: Asset Pricing Models
		The Capital Asset Pricing Model
			A Conceptual Development of the CAPM
			The Security Market Line
		Empirical Tests of the CAPM
			Stability of Beta
			Relationship between Systematic Risk and Return
			Additional Issues
			Summary of Empirical Results for the CAPM
		The Market Portfolio: Theory versus Practice
		Arbitrage Pricing Theory
			Using the APT
			Security Valuation with the APT: An Example
			Empirical Tests of the APT
		Multifactor Models and Risk Estimation
			Multifactor Models in Practice
			Estimating Risk in a Multifactor Setting: Examples
Part 3: Valuation and Management of Common Stocks
	Chapter 8: Equity Valuation
		Important Distinctions
			Fairly Valued, Overvalued, and Undervalued
			Top-Down Approach versus Bottom-Up Approach
		An Introduction to Discounted Cash Flow and Relative
 Valuation
			The Foundations of Discounted Cash Flow Valuation
			The Constant Growth Model
			The No-Growth Model
			Multistage (or Two-Stage) Growth Assumption
		Discounted Cash Flow
			Method #1: The Dividend Discount Model
			Method #2: Free Cash Flow to Equity—The Improved DDM
			Method #3: Discounted Cash Flow (FCFF)
		Relative Valuation
			Implementing Relative Valuation
			Relative Valuation with CSCO
			Advantages of Multiples
			Disadvantages of Multiples
		Ratio Analysis
			Growth Rate of Sales
			Gross Margins
			Operating Margins
			Net Margins
			Accounts Receivable Turnover
			Inventory Turnover
			Net PP&E Turnover
			Debt as a Percentage of Long-Term Capital
			Changes in Reserve Accounts
			Operating Earnings/GAAP Earnings
		The Quality of Financial Statements
			Balance Sheet
			Income Statement
			Footnotes
		Moving on to Chapter 9
		Chapter 8 Appendix: Derivation of Constant-Growth Dividend
 Discount Model (DDM
	Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
		Introduction to Market Analysis
		Aggregate Market Analysis (Macroanalysis)
			Leading, Coincident, and Lagging Indicators
			Sentiment and Expectations Surveys
			Interest Rates
		Microvaluation Analysis
			FCFE to Value the Market
			Multiplier Approach
			Shiller P/E Ratio
			Macrovaluation and Microvaluation of World Markets
		Introduction to Industry Analysis: Why Industry Analysis
 Matters
		Industry Analysis
			The Business Cycle and Industry Sectors
			Structural Economic Changes Impact the Industry(Noncyclical Factors)
			Industry Life Cycle
			Industry Competition
		Estimating Industry Rates of Return
			Estimating the Cost of Capital
			Sales Growth Estimates
			Other Considerations
		Global Industry Analysis
			Company Analysis
			Growth Companies and Growth Stocks
			Defensive Companies and Stocks
			Cyclical Companies and Stocks
			Value versus Growth Investing
		Connecting Industry Analysis to Company Analysis
			Firm Competitive Strategies
			SWOT Analysis
		Calculating Intrinsic Value
			Some Additional Insights on Valuation—For Individual Companies
			Analyzing Growth Companies
		Lessons from Some Legends
			Some Lessons from Lynch
			Tenets of Warren Buffett
			Tenets of Howard Marks
	Chapter 10: The Practice of Fundamental Investing
		Initial Public Offerings
			Why Go Public
			The IPO Process
			Underpricing
			Market Stabilization
			Reasons for Underpricing
			Bookbuilt Offering versus Auction
			Longer-Term Performance of IPOs
		Buy-Side Analysts and Sell-Side Analysts
			Sell-Side Analysts
			Buy-Side Analysts
			Financial Analyst Forecasting Literature
			Snap Inc. IPO and Analysts
		Capital Allocation
			The Seven Places That Capital Can Be Allocated
			Dividends versus Repurchases
			What Do Investors Want to See?
		Corporate Governance
			The Board of Directors
			Anti-Takeover Provisions
			Compensation
		Creating a Stock Pitch
			Air Lease Pitch
			A Few Closing Points Concerning Stock Pitches
		Chapter 10 Appendix:
			A Few Closing Points Concerning Stock Pitches
			The Plane Truth
	Chapter 11: Equity Portfolio Management Strategies
		Passive versus Active Management
		An Overview of Passive Equity Portfolio Management Strategies
			Index Portfolio Construction Techniques
			Tracking Error and Index Portfolio Construction
			Methods of Index Portfolio Investing
		An Overview of Active Equity Portfolio Management
 Strategies
			Fundamental Strategies
			Technical Strategies
			Factors, Attributes, and Anomalies
			Forming Momentum-Based Stock Portfolios: Two Examples
			Tax Efficiency and Active Equity Management
			Active Share and Measuring the Level of Active Management
		Value versus Growth Investing: A Closer Look
		An Overview of Style Analysis
		Asset Allocation Strategies
			Integrated Asset Allocation
			Strategic Asset Allocation
			Tactical Asset Allocation
			Insured Asset Allocation
Part 4: Valuation and Management  of Bonds
	Chapter 12: Bond Fundamentals and Valuation
		Basic Features of a Bond
			Bond Characteristics
		The Global Bond Market Structure
			Participating Issuers
			Participating Investors
			Bond Ratings
		Survey of Bond Issues
			Domestic Government Bonds
			Government Agency Issues
			Municipal Bonds
			Corporate Bonds
			Nontraditional Bond Coupon Structures
			High-Yield Bonds
			International Bonds
		Bond Yield Curves
			The Determinants of Bond Yields
			Yield Curves and the Term Structure of Interest Rates
			Par versus Spot Yield Curves
			Yield Curves for Credit-Risky Bonds
			Determining the Shape of the Term Structure
		Bond Valuation
			Par versus Spot Bond Valuation
			Bond Valuation and Yields with Semiannual Coupons
			Relationship between Bond Yields, Coupon Rates, and Bond Prices
			Bond Valuation between Coupon Dates
			Computing Other Bond Yield Measures
	Chapter 13: Bond Analysis and Portfolio Management Strategies
		Bond Analysis Tools
			Implied Forward Rates
			Bond Duration
			Bond Convexity
			Bonds with Embedded Options
			Yield Spread Analysis
		An Overview of Bond Portfolio Management: Performance, Style, and Strategy
		Passive Management Strategies
			Buy-and-Hold Strategy
			Indexing Strategy
			Bond Indexing in Practice: An Example
		Active Management Strategies
			Interest Rate Anticipation
			Credit Analysis
			Implementing an Active Bond Transaction
			Active Global Bond Investing: An Example
		Core-Plus Management Strategies
		Matched-Funding Management Strategies
			Dedicated Portfolios
			Immunization Strategies
			Horizon Matching
		Contingent and Structured Management Strategies
		Chapter 13 Appendix: Closed-Form Equation for Calculating Macaulay Duration
Part 5: Derivative Security Analysis
	Chapter 14: An Introduction to Derivative Markets and Securities
		Overview of Derivative Markets
			The Language and Structure of Forward and Futures Markets
			Interpreting Futures Price Quotations: An Example
			The Language and Structure of Option Markets
			Interpreting Option Price Quotations: An Example
		Investing with Derivative Securities
			The Basic Nature of Derivative Investing
			Basic Payoff and Profit Diagrams for Forward Contracts
			Basic Payoff and Profit Diagrams for Call and Put Options
			Option Profit Diagrams: An Example
		The Relationship between Forward and Option Contracts
			Put–Call–Spot Parity
			Put–Call Parity: An Example
			Creating Synthetic Securities Using Put–Call Parity
			Adjusting Put–Call–Spot Parity for Dividends
			Put–Call–Forward Parity
		An Introduction to the Use of Derivatives in Portfolio
 Management
			Restructuring Asset Portfolios with Forward Contracts
			Protecting Portfolio Value with Put Options
			An Alternative Way to Pay for a Protective Put
	Chapter 15: Forward, Futures, and Swap Contracts
		An Overview of Forward and Futures Trading
			Futures Contract Mechanics
			Comparing Forward and Futures Contracts
		Hedging with Forwards and Futures
			Hedging and the Basis
			Understanding Basis Risk
			Calculating the Optimal Hedge Ratio
		Forward and Futures Contracts: Basic Valuation
 Concepts
			Valuing Forwards and Futures
			The Relationship between Spot and Forward Prices
		Financial Forwards and Futures: Applications and Strategies
			Interest Rate Forwards and Futures
			Long-Term Interest Rate Futures
			Short-Term Interest Rate Futures
			Stock Index Futures
			Currency Forwards and Futures
		OTC Forward Contracts
			Interest Rate Contracts
			Equity Index-Linked Swaps
		Chapter 15 Appendix: Calculating Money Market Implied Forward Rates
	Chapter 16: Option Contracts
		An Overview of Option Markets and Contracts
			Option Market Conventions
			Price Quotations for Exchange-Traded Options
		The Fundamentals of Option Valuation
			The Basic Approach
			Improving Forecast Accuracy
			The Binomial Option Pricing Model
			The Black–Scholes Valuation Model
			Estimating Volatility
			Problems with Black–Scholes Valuation
		Option Valuation: Extensions
			Valuing European-Style Put Options
			Valuing Options on Dividend-Bearing Securities
			Valuing American-Style Options
		Option Trading Strategies
			Protective Put Options
			Covered Call Options
			Straddles, Strips, and Straps
			Strangles
			Spreads
			Range Forwards
		Other Option Applications
			Convertible Bonds
			Credit Default Swaps
Part 6: Analysis and Evaluation of Asset Management
	Chapter 17: Professional Portfolio Management, Alternative Assets, and Industry Ethics
		The Asset Management Industry: Structure and Evolution
		Private Management and Advisory Firms
			Investment Strategy at a Private Money Management
 Firm
		Organization and Management of Investment
 Companies
			Valuing Investment Company Shares
			Closed-End versus Open-End Investment Companies
			Fund Management Fees
			Investment Company Portfolio Objectives
			Breakdown by Fund Characteristics
			Global Investment Companies
			Mutual Fund Organization and Strategy: An Example
		Investing in Alternative Asset Classes
			Hedge Funds
			Characteristics of a Hedge Fund
			Hedge Fund Strategies
			Risk Arbitrage Investing: A Closer Look
			Hedge Fund Performance
			Private Equity
		Ethics and Regulation in the Professional Asset
 Management Industry
			Regulation in the Asset Management Industry
			Standards for Ethical Behavior
			Examples of Ethical Conflicts
		What Do You Want from a Professional Asset Manager?
	Chapter 18: Evaluation of Portfolio Performance
		The Two Questions of Performance Measurement
		Simple Performance Measurement Techniques
			Peer Group Comparisons
			Portfolio Drawdown
		Risk-Adjusted Portfolio Performance Measures
			Sharpe Portfolio Performance Measure
			Treynor Portfolio Performance Measure
			Jensen Portfolio Performance Measure
			Information Ratio Performance Measure
			Sortino Performance Measure
			Summarizing the Risk-Adjusted Performance Measures
		Application of Portfolio Performance Measures
		Holdings-Based Portfolio Performance Measures
			Grinblatt–Titman Performance Measure
			Characteristic Selectivity Performance Measure
		The Decomposition of Portfolio Returns
			Performance Attribution Analysis
			Fama Selectivity Performance Measure
		Factors That Affect Use of Performance Measures
			Demonstration of the Global Benchmark Problem
			Implications of the Benchmark Problems
			Required Characteristics of Benchmarks
		Reporting Investment Performance
			Time-Weighted and Money-Weighted Returns
			Performance Presentation Standards
Appendix A The CFA® Charter
Appendix B Code of Ethics and Standards of Professional Conduct
Appendix C Interest Tables
Appendix D Standard Normal Probabilities
Comprehensive References List
Glossary
Index