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