Understanding Investments: Theories and Strategies 2nd Edition

Cover
Half Title
Title Page
Copyright Page
Dedication
Contents
List of illustrations
Acknowledgments
Preface to second edition
Preface to first edition
PART I INVESTMENT BASICS
	1 The investment framework
		1.1 Introduction
		1.2 The general financial and economic environment
			1.2.1 Definition of investments
			1.2.2 The general investment environment
				1.2.2.1 Securities
				1.2.2.2 Classification of securities
				1.2.2.3 Types of investors
			1.2.3 Financial markets and intermediaries
				1.2.3.1 The roles of financial markets
				1.2.3.2 The roles of financial intermediaries
		1.3 The objectives and constraints of investors
			1.3.1 The objeetives of investors
			MARKET FLASH Are you realizing your objectives?
			1.3.2 The constraints of investors
		1.4 The investment management process
		1.5 The role of investment information
		1.6 Agency and ethical issues in investing
			1.6.1 Asymmetric information
			MARKET FLASH Reducing asymmetric information
			1.6.2 The agent-principal problem
			MARKET FLASH Conflicts between managers and shareholders?
			1.6.3 Ethics in the marketplace
			1.6.4 Environmental, social, and governance
				1.6.4.1 Social responsibility issues
				1.6.4.2 Environmental issues
				1.6.4.3 Corporate governance issues
		1.7 So why study investments?
		1.8 Chapter summary
		1.9 The plan of the textbook
		Applying economic analysis: Utility and efficiency
		International focus: Causes and consequences of the financial crisis of 2008
		Lessons of our times: Lessons of the global financial crisis
		Key concepts
		Questions and problems
	2 The investment decision process and investment strategies
		2.1 Introduction
		2.2 The investment process
			2.2.1 The investor policy statement
			2.2.2 The risk-return trade-off
			2.2.3 The asset allocation step in the investment process
			2.2.4 The security selection step in the investment process
			MARKET FLASH What if the paradigm for long-term investing was to change?
		2.3 General investment philosophies and strategies
			2.3.1 Some prominent investment philosophies
			2.3.2 What is your investment philosophy?
			2.3.3 Some investment strategies
				2.3.3.1 Top-down and bottom-up approaches to investing
				2.3.3.2 Active and passive investment strategies:
				MARKET FLASH Active or passive investment strategy?
				2.3.3.3 Other investment strategies
				2.3.3.4 Dollar-cost averaging
				2.3.3.5 Margin purchases and short sales
				MARKET FLASH China cracks down on margin trading violations
				MARKET FLASH Short sales gone bad
		2.4 Types of markets and orders
			2.4.1 Types of trading markets
			2.4.2 Types of trading orders
			MARKET FLASH Tick sizes
			2.4.3 Finding the equilibrium price of a share
		2.5 Chapter summary
		Applying economic analysis: Making investment decisions
		International focus: Stocks or bonds amid a weak economic recovery?
		Lessons of our times: Asset allocation lessons from Warren Buffett
		Key concepts
		Questions and problems
	3 Fundamentals of risk and return
		3.1 Introduction
		3.2 Measuring return
			3.2.1 Holding period return
			3.2.2 Return over multiple periods
				3.2.2.1 Arithmetic mean
				3.2.2.2 Geometrie mean
				3.2.2.3 The effective annual rate
				3.2.2.4 Yield definitions and conventions
				3.2.2.5 Real rate of return
				3.2.2.6 Expected rate of return
		3.3 Measuring risk
			3.3.1 Calculating the risk of a single asset
			MARKET FLASH Problems with negative interest rates
			3.3.2 Required returns and risk aversion
			3.3.3 Investor behavior and low interest rates
			3.3.5 Risk and investor economic decisions
			3.3.6 Utility and wealth
			3.3.7 Indifference curves and utility function
			3.3.8 Indifference curves and risk aversion
		3.4 Chapter summary
		Applying economic analysis: Is it worth pursuing further education?
		International focus: Treasuries outperform stocks
		Lessons of our times: The Reserve Primary Fund
		Key concepts
		Questions and problems
		Appendix: A brief review of the time value of money (TMV)
PART II FINANCIAL MARKETS, INTERMEDIARIES, AND INSTRUMENTS
	4 The global financial environment
		4.1 Introduction
		4.2 The functions of die global financial markets
			4.2.1 Economic function
			4.2.2 Pricing function
			4.2.3 Provision of services
			4.2.4 Other functions
		4.3 The securities exchanges
			4.3.1 US organized stock exchanges
				4.3.1.1 Types of brokers
				4.3.1.2 NYSE operations
				4.3.1.3 NYSE-related exchanges
			4.3.2 US Over-the-counter securities markets
			MARKET FLASH New index for OTC Markets Group
				4.3.2.1 NASDAQ
				4.3.2.2 Other OTC markets
				4.3.2.3 How to read stock tables
			4.3.3 Some US stock market indexes
			4.3.4 Some international stock exchanges
			MARKET FLASH European equity traders want a shorter trading day
			4.3.5 The US bond market
			4.3.6 The international bond market
		4.4 Trading on the exchanges
			4.4.1 Clearing procedures
			4.4.2 Brokerage services
			4.4.3 Trading costs
			MARKET FLASH Charles Schwab eliminates trading commissions
			MARKET FLASH Instances of front-running activities
			4.4.4 Automatic trading mechanisms
			MARKET FLASH SEC implements a Limit Up/Limit Down plan
		4.5 Globalization and the regulatory structure of international stock markets
			4.5.1 Globalization and trends
			MARKET FLASH Delisting of Chinese stocks?
			4.5.2 Investing internationally and international return
			4.5.3 Regulatory structures in the US exchanges
		4.6 Chapter summary
		Applying economic analysis: Costs and benefits of financial globalization (and trade)
		International focus: New offerings by the London Stock Exchange
		Lessons of our times: Lessons learned from the financial crisis and recommendations for financial institutions
		Key concepts
		Questions and problems
		Appendix: Calculating a stock market index
	5 Money and capital market instruments and strategies
		5.1 Introduction
		5.2 The money market and its instruments
			5.2.1 The money market and its characteristics
			MARKET FLASH High demand for the international money market
			5.2.2 Money market instruments
				5.2.2.1 Nonmarketable securities
				5.2.2.2 Marketable securities
				MARKET FLASH The global market for commercial paper
				MARKET FLASH Repo worries and bailout efforts
				MARKET FLASH The debate on replacing the fed funds rate
				MARKET FLASH Replacing LIBOR
				5.2.2.3 Yields and spreads in money market instruments
		5.3 The capital market and its instruments
			5.3.1 The capital market and its characteristics
			5.3.2 Fixed-income securities
				5.3.2.1 Federal government bonds
				5.3.2.2 Municipal securities
				5.3.2.3 Agency bonds
				5.3.2.4 Corporate bonds
			5.3.3 Yields and spreads in capital market instruments
			5.3.4 Equity securities
			5.3.5 Derivative securities
		5.4 Investment risks in financial markets
		MARKET FLASH Climate-change investment risk
		5.5 Some money and capital market investment strategies
			5.5.1 Some money market Investment strategies
			5.5.2 Some capital market investment strategies
		5.6 Chapter summary
		Applying economic analysis: Insider trading
		International focus: The Greek debt crisis
		Lessons of our times: Lessons from Iceland\'s financial crisis
		Key concepts
		Questions and problems
	6 Investment bankers and investment companies
		6.1 Introduction
		6.2 Investment banking
			6.2.1 The primary market
			6.2.2 Shelf Registration
			6.2.3 The investment banker
			MARKET FLASH Leading underwriters in the US
		6.3 Initial public offering
			6.3.1 IPO participants
			6.3.2 IPO arrangements
			6.3.3 IPO documents
			6.3.4 Road show and book building
			6.3.5 Costs of IPO
			6.3.6 Performance of IPOs
		6.4 The investment companies industry
			6.4.1 Functions of investment companies
			6.4.2 Net asset value
			6.4.3 Types of investment companies
				6.4.3.1 Unit investment trust
				6.4.3.2 Closed-end investment companies
				MARKET FLASH The SEC requires CEF to disclose more
				6.4.3.3 Open-end investment companies
				6.4.3.4 Fee structure of mutual funds
				6.4.3.5 Picking a mutual fund
				MARKET FLASH Mutual fund expense ratios fell significantly
				6.4.3.6 Growth of mutual funds
				6.4.3.7 Performance of the mutual fund industry
		6.5 Exchange-traded funds
			6.5.1 Characteristics of ETFs
			6.5.2 Regulation of ETFs
			MARKET FLASH What is happening with ETFs?
		6.6 Some strategies in mutual fund investments
			6.6.1 Simple strategies
			6.6.2 More robust strategies
		6.7 Other types of investment companies
		6.8 Chapter summary
		Applying economic analysis: Cost-benefit analysis at the ICI
		International focus: Global IPOs
		Lessons of our times: Bogle on the mutual fund industry
		Key concepts
		Questions and problems
PART III PORTFOLIO THEORY
	7 Diversification and asset allocation
		7.1 Introduction
		7.2 The diversification principle
			7.2.1 Diversification types
				7.2.1.1 Naïve or random diversification
				7.2.1.2 International diversification
				7.2.1.3 Efficient diversification
			7.2.2 Covariance and correlation
		7.3 The asset allocation decision
			7.3.1 The process of asset allocation
			7.3.2 Some strategies of asset allocation
			7.3.3 Some approaches to asset allocation
			7.3.4 Implementing asset allocation approaches
			7.3.5 Asset allocation and risk tolerance
			7.3.6 The importance of asset allocation
		7.4 Examples of asset allocation
			7.4.1 Risky portfolios and combined portfolios
			7.4.2 Some practical problems of asset allocation
			7.4.3 The capital allocation line
			7.4.4 Borrowing and lending opportunities on the CAL
			7.4.5 The capital market line and investment strategies
			MARKET FLASH Explaining the shifts from active to passive investing
			7.4.6 Asset allocation and risk aversion
			7.4.7 Some common diversification fallacies
		7.5 Chapter summary
		Applying economic analysis: The principle of diversification
		International focus: The importance and consequences importance of global allocation decisions
		Lessons of our times: Markowitz on the 20 OB financial crisis
		Key concepts
		Questions and problems
		Appendix A: Review of regression analysis
		Appendix Β: How to compute the co variance and correlation in Excel
	8 Efficient diversification and capital market theory
		8.1 Introduction
		8.2 The Markowitz diversification approach
			8.2.1 The Marko witz two-as set portfolio
				8.2.1.1 Assumptions
				8.2.1.2 Borrowing and lending
				8.2.1.3 Generalizing risk to many assets
				8.2.1.4 Dynamic correlations
				MARKET FLASH Some reasons for high (er) correlations in recent years
			8.2.2 The optimal risky portfolio and the capital allocation line
			8.2.3 The efficient frontier
		8.3 Capital market theory
			8.3.1 The capital asset pricing model
				8.3.1.1 SML vs. CML
				8.3.1.2 Assumptions of the CAPM
				8.3.1.3 Implications of the assumptions
				8.3.1.4 Deriving CAPM
				8.3.1.5 Interpreting the SML
				8.3.1.6 The security characteristic line
				8.3.1.7 Uses of CAPM
				8.3.1.8 Criticism of CAPM
				MARKET FLASH Why is CAPM still in use?
			8.3.2 The arbitrage pricing theory
			8.3.3 Comparing the CAPM and the APT
			8.3.4 Some important multifactor models
			8.3.5 Portfolio performance evaluation
		8.4 CAPM, APT, and investment decisions
		8.5 Chapter summary
		Applying economic analysis: Using utility theory to make a decision involving risk
		International focus
		Lessons of our times: The alpha- beta debate
		Key concepts
		Questions and problems
		Appendix A: How to find and graph the optimal two-asset portfolio using Excel
		Appendix Β: The single-index asset model
	9 Market efficiency and behavioral finance
		9.1 Introduction
		9.2 The efficient market hypothesis
			9.2.1 The notion of market efficiency
			9.2.2 The forms of market efficiency
			9.2.3 Implications of the efficient market hypothesis
				9.2.3.1 Implications for technical analysis
				9.2.3.2 Implications for fundamental analysis
				9.2.3.3 Implications for active and passive investment strategies
				9.2.3.4 Implications for investment managers
				9.2.3.5 Implications for asset pricing models
				MARKET FLASH The 2013 Nobel Prize in Economics
				9.2.3.6 Other implications
		9.3 Anomalies and tests of market efficiency
			9.3.1 Market anomalies
				9.3.1.1 Return patterns
				9.3.1.2 Short and long-horizon returns
				9.3.1.3 The size and Ρ/E effects
				9.3.1.4 Announcement effects
				9.3.1.5 Other effects
			9.3.2 Summary of market efficiency tests
			9.3.3 Is the stock market efficient?
			MARKET FLASH Market efficiency in the news
		9.4 Behavioral finance
			9.4.1 Biases in information processing
			9.4.2 Biases in behavior
			9.4.3 Models of human behavior
			9.4.4 Implications for investment professionals
			9.4.5 Implications for technical analysis
			MARKET FLASH Contrarian investors and lessons
		9.5 Chapter summary
		Applying economic analysis: Keynes\' beauty contest and investor behavior
		International focus: Do central banks create bubbles?
		Lessons of our times: The \"noisy market\" hypothesis
		Key concepts
		Questions and problems
PART IV EQUITY PORTFOLIO MANAGEMENT
	10 Equity and fundamental analyses
		10.1 Introduction
		10.2 Equity securities
			10.2.1 Common stock characteristics
				10.2.1.1 Shareholder equity
				10.2.1.2 Shareholder rights
				10.2.1.3 Voting privileges
				10.2.1.4 Types of common stock
				MARKET FLASH Dual-class common stock
				10.2.1.5 Dividends and splits
			10.2.2 Preferred stock characteristics
				10.2.2.1 Issuers of and investors in preferred stock
		10.3 Stock market quotations
		10.4 Management of an equity portfolio
			10.4.1 Passive equity portfolio management
				10.4.1.1 Individual investors
				10.4.1.2 Institutional investors
			10.4.2 Active equity portfolio management
				10.4.2.1 Individual investors
				10.4.2.2 Institutional investors
			10.4.3 Equity styles
			MARKET FLASH Some popular investing myths disputed
			10.4.4 International equity investing
				10.4.4.1 The global financial asset portfolio
		10.5 Fundamental analysis
			10.5.1 Macroeconomic analysis
				10.5.1.1 Macro economic magnitudes
				10.5.1.2 Economic policies
				10.5.1.3 Recent Fed policies and the financial markets
				MARKET FLASH Zero or negative interest rates and investments
				10.5.1.4 The business cycle
			10.5.2 Industry analysis
		10.6 Chapter summary
		Applying economic analysis
		International focus: Predicting the business cycle
		Lessons of our times: Some dangers of investing
		Key concepts
		Questions and problems
		Appendix: Guidelines for conducting industry analysis
	11 Equity valuation and investment strategies
		11.1 Introduction
		11.2 Equity prices and returns
		11.3 Some general valuation approaches
			11.3.1 Book value
			11.3.2 Price/book value
			11.3.3 Price/sales value
			11.3.4 Liquidation value
			11.3.5 Replacement value
		11.4 The dividend discount model and its variants
			11.4.1 The dividend discount model
			11.4.2 The constant growth model
			11.4.3 The multistage dividend growth model
				11.4.3.1 Two-stage DDM
				11.4.3.2 Three-stage DDM
				11.4.3.3 Two-stage DDM with growth rate derived
			11.4.4 Using earnings instead of dividends
				11.4.4.1 Some strategies using earnings and dividends
				MARKET FLASH Is the P/E ratio dead?
		11.5 Other equity valuation techniques
			11.5.1 Present value of free cash flows
			11.5.2 Option valuation approach
			11.5.3 Economic profit
		11.6 Other issues in equity valuation
			11.6.1 The impact of inflation on stock values
			MARKET FLASH Buffett\'s advice on stock investing during inflationary periods
			11.6.2 Information signals/content of dividends
			11.6.3 The P/E ratio and the stock market
		11.7 Some strategies on when to buy/sell equities
			11.7.1 When to buy/sell a stock
		11.8 Chapter summary
		Applying economic analysis: To give or not to give dividends? To cut or not to cut dividends?
		International focus: The crisis and fair-value accounting
		Lessons of our times: Financial crises: Time to buy?
		Key concepts
		Questions and problems
PART V DEBT SECURITIES
	12 Bond fundamentals and valuation
		12.1 Introduction
		12.2 Overview of the global bond market
			12.2.1 The international bond market
			MARKET FLASH The US and Japanese government bond markets
			12.2.2 The US bond market and its importance
		12.3 Overview of bond basics
			12.3.1 Features of a bond
			12.3.2 Bond types and characteristics
				12.3.2.1 By type of issuer
				MARKET FLASH Ghana\'s venture into the Eurobond market
				12.3.2.2 By bond feature
				12.3.2.3 By other characteristics
		12.4 Bond pricing
			12.4.1 Basic bond valuation formulas
			12.4.2 The inverse relationship between prices and yields
			12.4.3 Bond yield measures
		12.5 Duration and convexity
			12.5.1 Duration
			12.5.2 Convexity
			MARKET FLASH Focus on a bond\'s negative convexity
		12.6 The yield curve
			MARKET FLASH Is a YC steepening good news for investors?
			12.6.1 Significance of the yield curve
			12.6.2 Theories explaining the shape of the yield curve
			12.6.3 A simple strategy using the yield curve
		12.7 Chapter summary
		Applying economic analysis: A bond\'s reinvestment risk
		International focus: Eurozone\'s sovereign debt crisis
		Lessons of our times: Downgrading US debt
		Key concepts
		Questions and problems
	13 Bond porfolio management and performance evaluation
		13.1 Introduction
		13.2 Overview of the bond investment management process
			13.2.1 Identify investor objectives and constraints
			13.2.2 Establish the investment policy
			13.2.3 Select a bond portfolio management strategy
			13.2.4 Monitor and evaluate portfolio performance
		13.3 Passive bond investment strategies
			13.3.1 Buy-and-hold portfolio strategy
			13.3.2 Indexing bond strategies
				13.3.2.1 Pure indexing strategy
				13.3.2.2 Enhanced indexing strategy
			13.3.3 Immunization strategy
				13.3.3.1 Rebalancing
				13.3.3.2 Dedication strategy
		13.4 Active bond portfolio strategies
			13.4.1 Interest rate anticipation strategy
			13.4.2 Credit analysis
			13.4.3 Valuation analysis.
			13.4.4 Bond swap strategies
				13.4.4.1 Substitution swap
				13.4.4.2 Yield swap
				13.4.4.3 Quality swap
				13.4.4.4 Other reasons for bond swapping
			13.4.5 Yield curve strategies
			13.4.6 Horizon analysis
			13.4.7 Other active management strategies
				13.4.7.1 Horizon matching technique
				13.4.7.2 Contingent immunization
		13.5 Bond portfolio performance measurement and evaluation
			13.5.1 Bond portfolio performance measures
			13.5.2 Bond portfolio performance evaluation
			13.5.3 Performance attribution analysis
		13.6 Bond market efficiency and bond portfolio management
			13.6.1 Bond market efficiency
			13.6.2 Implications for bond portfolio management
		13.7 Chapter summary
		Applying economic analysis: Active of passive investment management?
		International focus: Bond investments and strategies in and out of the EMU
		Lessons of our times: Lessons for the European insurance industry
		Key concepts
		Questions and problems
PART VI DERIVATIVE MARKETS AND OTHER INVESTMENTS
	14 Option market s and valuation models
		14.1 Introduction
		14.2 An overview of the options market
			14.2.1 Basic option concepts
				14.2.1.1 Call and put option concepts
				14.2.1.2 Profits and losses on options
				14.2.1.3 Options payoffs at expiration
			14.2.2 The market for options
				14.2.2.1 The Options Clearing Corporation
				MARKET FLASH New OCC tools
				14.2.2.2 Options market participants
				14.2.2.3 Options products
				14.2.2.4 Securities with options
				MARKET FLASH CLOs and leveraged loans
		14.3 Some options trading strategies
			14.3.1 Covered call
			14.3.2 Protective put
			14.3.3 Collar
			14.3.4 Straddle
			14.3.5 Married put
			14.3.6 Spread strategies
			14.3.7 Speculating with options
		14.4 Option valuation
			14.4.1 Fundamental option valuation concepts
			14.4.2 Binomial option pricing
			14.4.3 The Black-Scholes-Merton option valuation model
			MARKET FLASH Did the VIX worsen market turmoil in 2018?
			14.4.4 Using the Black-Scholes-Merton formula
			14.4.5 Put-call parity formula
		14.5 Using stock index options
		14.6 Chapter summary
		Applying economic analysis: Purchasing stocks or options?
		International focus: Global currency options volatility indexes
		Lessons of our times: What, if anything, have big banks learned from rogue derivatives traders?
		Key concepts
		Questions and problems
	15 Futures markets and strategies
		15.1 Introduction
		15.2 The futures contract
			15.2.1 Elements of futures contracts
			15.2.2 The clearinghouse
			15.2.3 Settlement and margin
			15.2.4 Reversing trades
		15.3 An overview of the futures market
			15.3.1 Economic functions of the futures market
				15.3.1.1 Price discovery
				15.3.1.2 Risk reduction
				15.3.1.3 Hedging
				15.3.1.4 Speculating
				15.3.1.5 Market organization
			15.3.2 Regulation of futures markets
			15.3.3 International futures exchanges
			MARKET FLASH China\'s overhaul of its futures market
			15.3.4 The commodity futures market
		15.4 Futures and spot prices
			15.4.1 Spot futures parity
			15.4.2 Basis risk
			15.4.3 Short hedge
		15.5 Financial futures contracts
			15.5.1 Some financial futures contracts
				15.5.1.1 Equity index futures
				15.5.1.2 Interest rate futures
				15.5.1.3 Currency futures
				MARKET FLASH The CME group thinks robo-orders is the future
			15.5.2 Information on financial futures
				15.5.2.1 S&P futures vs. fair value
				15.5.2.2 Leverage
		15.6 Futures trading strategies
			15.6.1 Hedging
			15.6.2 Speculating
			15.6.3 Program trading and index arbitrage
			15.6.4 Using currency futures
			15.6.5 Risk arbitrage
		15.7 Chapter summary
		Applying economic analysis: Application of arbitrage
		International focus: CME group\'s push into global markets
		Lessons of our times: OTC derivatives market reform
		Key concepts
		Questions and problems
	16 Other investment topics and themes in investment management
		16.1 Introduction
		16.2 International parities and some strategies
			16.2.1 Useful concepts
			16.2.2 Interest rate parity
			16.2.3 Carry trade
			16.2.4 International arbitrage
		16.3 Credit derivatives
			16.3.1 The market for credit derivatives
			16.3.2 Credit default swap
			MARKET FLASH Calls for the termination of the CDS market
			16.3.3 Total return swap
			16.3.4 Asset swap
			16.3.5 Collateralized debt obligation
		16.4 Alternative investments
			16.4.1 What are alternative investments?
			16.4.2 Real estate investment trusts
			16.4.3 Hedge funds
			16.4.4 Private equity firms
			MARKET FLASH Why private equity firms made fewer deals in 2019
			16.4.5 Infrastructure funds
			16.4.6 Other alternative investments
		16.5 Disruptive technologies
			16.5.1 Cryptocurrencies
			MARKET FLASH The risks of investing in cryptocurrencies
			16.5.2 Fintech
			16.5.3 Smart beta analytics
			MARKET FLASH The continuing rise of smart beta strategies
			16.5.4 Energy alternatives
		16.6 Trends in investment management
			16.6.1 Demographic shifts
			16.6.2 Cannabis equities
			16.6.3 Innovative pricing schemes
		16.7 Putting it all together
		16.8 Chapter summary
		Applying economic analysis: Traditional or alternative investments?
		International focus: Credit default swaps and the European sovereign debt crisis
		Lessons of our times: University endowments and alternative investments
		Key concepts
		Questions and problems
Appendix
Index