Contents 1
Part 1
1 The Investment Background 2
Chapter 1 4
The Investment Setting 4
WHAT IS AN INVESTMENT? 4
INVESTMENT DEFINED 5
MEASURING RETURN AND RISK 6
MEASURING HISTORICAL RATES OF RETURN 6
COMPUTING MEAN HISORICAL RETURNS 8
CALCUATING EXPECTED RATES OF RETURN 11
MEASURING THE RISK OF EXPECTED RATES OF RETURN 14
RISK MEASURES FOR HISTORICAL RETURNS 15
DETERMINING REQUIRED RATES OF RETURN 16
THE REAL RISK-FREE RATE 17
FACTORS INFLUENCING THE NOMINAL RISK-FREE RATE 17
RISK PREMIUM 20
RISK PREMIUM AND PROTFOLIO THEORY 22
FUNDAMENTAL RISK VERSUS SYSTEMATIC RISK 23
SUMMARY OF REQUIRED RATE OF RETURN 23
RELATIONSHIP BETWEEN RISK AND RETURN 24
CHANGES IN THE SLOPE OF THE SML 25
CHANGES IN CAPITAL MARKET CONDITIONSOR EXPECTED INFLATION 27
SUMMARP OF CHANGES IN THE REQUIRED RATE OF RETURN 27
OUTLINE OF THE BOOK 28
Chapter l APPENDIX 28
Computation of Variance and Standard Deviation 33
asset allocation 37
INDIVIDUAL INVESTOR LIFE CYCLE 37
Chapter 2 37
PRE-INVESTMENT NEEDS 38
LIFE CYCLE INVESTMENTSTRATEGIES 38
LIFE CYCLE INVESTMENT GOLALS 40
THE PORTFOLIO MANAGEMENT PROCESS 40
THE NEED FOR A POLICY STATEMENT 41
UNDERSTAND AND ARTICULATE INVESTOR GOALS 41
PORTFOLIO PERFORMANCE STANDARDS 42
INPUT TO THE POLICY STATEMENT 43
INVESTMENT OBJECTIVES 43
INVESTMENT CONSTRAINTS 46
MUTUAL FUNDS 51
OBJECTIVES AND CONSTRAINTS OF INSTITUTIONAL INVESTORS 51
PENSION FUNDS 51
CONSTRUCTING THE POLICY STATEMENT 51
ENDOWMENT FUNDS 53
INSURANCE COMPANIES 53
BANKS 54
INSTUTIONAL INVESTOR SUMMARY 55
THE IMPORTANCE OF ASSET ALLOCATION 55
REAL INVESTMENT RETURNS AFTER TAXES AND COSTS 56
RETURNS AND RISKS OF DIFFERNT ASSET CLASSES 57
ASSET ALLOCATION SUMMARY 61
ASSET ALLOCATION AND CULTURAL DIFFERENCES 61
Chapter 3 66
Selecting Investments in a global Market 66
THE CASE FOR GLOBAL INVESTMENTS 67
RELATIVE SIZE OF U.S. FNANCIAL MARKETS 68
RATES OF RETURN ON U.S. AND FOWGN SECURITIES 69
INDIVIDUAL COUNTRY RISK AND RETURN 71
RISK OF COMBINED COUNTRY INVESTMENTS 71
GLOBAL INVESTMENT CHOICES 77
FIXED-INCOME INVESTMENTS 78
EQUITY INSTRUMENTS 82
SPECLAL EQUITY INSTRUMENTS：OPTIONS 84
FUTURES CONTRACTS 84
INVESTMENT COMPANIES 85
REAL ESTATE 86
LPW-LIQUIDITY INVESTMENTS 87
HISTORICAL RISK/RETURNS ON ALTERNATIVE INVESTMENTS 89
STOCKS, BONDS, AND T-BILLS 89
WORLD PORTFOLIO PERFORMANCE 91
ART AND ANTIQUES 94
REAL ESTATE 95
Chapter 3 APPENDIX 95
JENSE PORTFOLIO PERFORMANCE MEASURE 1000
APPLICATION OF PORTF0LIO PERFORMANCE MEASURES 1002
COMPONENTS OF INVESTMENT PERFORMANCE 1006
PERFORMANCE ATTRIBUTION ANALYSIS 1010
ASSET CLASS ATTRIBUTION ANALYSIS：AN EXAMPLE 1011
PERFORMANCE ATTRIBUTION EXTENSIONS 1013
MEASURING MARKET TIMING SKILLS 1015
FACTORS tw AFFECT USE OF PERFORMANCE MEASURES 1016
BENCHMARK ERRORS AND GLOBAL INVESTING 1017
A DEMONSTRATION OF THE GLOBAL BENCHMARK PROBLEM 1018
IMPLICATIONS OF BENCHMARK PROBLEMS RELIABILITY OF PERFORMANCE MEASURES 1019
Covariance and Correlation 102
RELIABILITY OF PERFORMANCE MEASURES 1021
EVALUATION OF BOND PORTFOLIO PERFORMANCE 1021
A BOND MARKET LINE 1021
DECOMPOSING PORTFOLIO RETURNS 1024
ANALYZING SOURCES OF RETURN 1026
REQUIRED CHARACTERISTICS OF BENCHAMARKS 1028
CONSISTENCY OF PERFORMANCE 1028
APPENDIX A 1036
How tO Become a Chart fred Financial Analyst 1036
APPENDIX B 1039
Code Of Ethics and Standards Of Professional Conduct 1039
APPENDIX C 1041
Interest Tables 1041
APPENDIX D 1047
Standard Normal Probabilities 1047
Glossary 1049
Organization and functioning of Securities Markets 105
Chapter 4 105
WHAT IS A MARKET? 106
CHARACTERISTICS OF A GOOD MARKET 106
Name/ComPany Index 1069
ORGANIZAION OF THE SECURITIES MARKET 107
Subject Index 1074
PRIMARY CAPITAL MARKETS 108
GOVERNMENT BOND ISSUES 108
MUNICIPAL BOND ISSUES 108
CORPORATE BOND AND STOCK ISSUES 109
PRIVATE PLACEMENTS AND RULE 144A 111
SECONDARY FINANCIAL MARKETS 111
WHY SECONDARY MARKETS ARE IMPORTANT 111
SECONDARY BOND MARKETS 112
FINANCIAL FUTURES 113
SECONARY EQUITY MARKETS 113
REGIONAL EXCHANGES AND THE OVER-THE-COUNTER MARKET 120
DETAILED ANALYSIS OF EXCHANGE MARKETS 125
EXCHNGE MEMBERSHIP 125
TYPES OF ORDERS 126
EXCHANGE MARKET MAKERS 131
CHANGES IN THE SECURITIES MARKETS 134
EVIDENCE AND EFFECT OF INSTITUTIONALIZATION 134
NEGOTIATED COMMISSION RATES 135
THE IMPACT OF BLOCK TRADES 136
INSTITUTIONS AND STOCK PRICE VOLATILITY 137
NATIONAL MARKET SYSTEM（NMS） 137
NEW TRADING SYSTEMS 140
GLOBAL MARKET CHANGES 141
FUTURE DEVELOPMENTS 143
Chapter 4 APPENDIX 148
Characteristics of Developed and Developing Markets around the WOrld 148
Security-market Indicator series 151
Chapter 5 151
USES OF SECURITY-MARKET INDEXES 152
DIFFERENTIATING FACTORS IN CONSTRUCTING MARKET INDEXES 153
THE SAMPLE 153
WEIGHTING SAMPLE MEMBERS 153
COMPUTAIONAL PROCEDURE 153
STOCK-MARKET INDICATOR SERIES 153
PRICE-WEIGHTED SERIES 153
VALUE-WEGHTED SERIES 156
UNWEIGHTED PRICE INDICATOR SERIES 157
GLOBAL EQUITY INDEXES 160
BOND-MARKET INDICATOR SERIES 165
INVESTMENT-GRADE BOND INDEXES 165
COMPOSITE STOCK-BOND INDEXES 167
GLOBAL GOVERNMENT BOND MARKET INDEXES 167
HIGH-YIELD BOND INDEXES 167
MERRILL LYNCH-WILSHIRE U.S. CAPIAL MARKETS INDES（ML-WCMI） 168
BRINSON PARTNERS GLOBAL SECURITY MARKET INDEX （GSMI） 168
COMPARISON OF INDEXES OVER TIME 169
CORRELATIONS AMONG MON THLY EQUITY PRICE CHANGES 169
CORRELATIONS AMONG MONTHLY BOND INDEXES 169
ANNUAL STOCK PRICE CHANGES 171
ANNUAL BOND RATES OF RETURN 171
Chapter 5 APPENDIX Foreign Stock-Market Indexes 177
Chapter 6 178
Sources of Information on global Investments 178
AGGREGATE ECONOMIC ANALYSIS 179
U.S. GOVERNMENT SOURCES 179
BANK PUBLICAUIBS 180
NON-U.S. ECONOMIC DATA 181
GOVERNMENT PUBLICATIONS 182
AGGREGATE SECURITY-MARKET ANALYSIS 182
COMMERIAL PUBLICATIONS 183
BROKERAGE FIRM REPORTS 186
INDUSTRY ANALYSIS 188
INDVSTRY PUBLICATIONS 188
INDUSTRY MAGAZINES 188
INDIVIDUAL STOCK AND BOND ANALYSIS 190
COMPANY-GANERATED INFORMATION 190
COMMERCIAL PUBLICATIONS 191
INVESTMENT MAGAZINES 194
BROKERAGE FIRM REPORTS 194
REQYURED INFORMATION 197
OBTAINING INFORMATION ON BONDS 197
SOURCES OF lNFORMATION ON MUTUAL FUNDS 198
SOVRCES OF BOND QVOTES 198
ACADEMIC JOURNALS 200
THEORETICAL AND EMPIRICAL ANALYSIS 200
DATA BANKS 202
COMPUTERIZED DATA SOURCES 202
ONLINE DATABASES 203
2 developments in Investment Theory 206
Efficient Capital Markets 208
Chapter 7 208
WHY SHOULD CAPITAL MARKETS BEEFFICIENT? 209
ALTERNATIVE EFFICIENT MARKET HYPOTHESES 210
EXPECTED RETURN OR FAIR GAME MODEL 210
SEMISTRONG-FORM EFFICIENT MARKET HYPOTHESIS 211
WEAK-FORM EFFICIENT MARKET HYPOTHESIS 211
Weak-Form HYPOTHESIS：IESTS AND RESULTS 212
TESTS AND RESULTS OF ALTERNATIVE EFFICIENT MARKET HYPOTHESIS 212
STRONG-FORM EFFICIENT MARKET HYPOTHESIS 212
SEMISTRONG-FORM HYPOTHESIS：TESTS AND RESULTS 215
STRONG-FORM HYPOTHESIS：TESTS AND RESULTS 234
EFFICIENT MARKETS AND TECHNICAL ANALYSIS 241
IMPLICATIONS OF EFFICIENT CAPITAL MARKETS 241
EFFICIENT MARKETS AND FUNDAMENTAL ANALYSIS 242
EFFICIENT MARKETS AND PORFOLIO MANAGEMENT 244
EFFICIENCY IN EUROPEAN EQUITY MARKETS 246
MOVEMENTS ALONG THE SML 25
Chapter 8 251
An introduction to Portfolio Management 251
SOME BACKGROUND ASSUMPTIONS 252
RISK AVERSION 252
DEFINITION OF RISK 253
MARKOWITZ PORTFOLIO THEORY 253
ALTERNATIVE MEASURES OF RISK 253
EXPECTED RATES OF RETURN 254
VARIANCE（STANDATD DEVIATION）OF RETURNS FOR AN INDIVIDUAL INVESTMKENT 254
VARIANCE（STANDARD DEVIATION） OF RETURNS FOR A PIPTFOLIO 255
STANDARD DEVIATION OF A PORTFOLIO 261
A THREE-ASSET PORTFILIO 268
ESTIMATION ISSUES 269
THE EFFICIENT FRONTIER AND INVESTOR UTILITY 270
THE EFFICIENT FRONTIER 270
ChaPter 8 APPENDIXES 275
Have Equal Variance 275
Variance When Correlation Equals-1．00 276
Chapter 9 277
An Introduction to Asset Pricing Models 277
CAPITAL MARKET THEORY：AN OVERVIEW 278
BACKGROUND FOR CAPITAL MARKET THEORY 278
RISK-FRE ASSET 280
THE MARKET PORTFOLIO 283
THE CAPITAL ASSET PRICING MODEL:EXPECTED RETURN AND RISK 287
THE SECURITY MARKET LINE（SML） 288
ARBITRAGE PRICING THEORY （ART） 297
EMPIRICAL TESTS OF THE APT 300
Extensions and Testing of Asset pricing Theories 305
Chapter 10 305
RELAXING THE ASSUMPTIONS 305
DIFFERENTIAL BORROW AND LENDING RATES 306
ZERO-BETA MODEL 307
TRANSACTIONS COSTS 308
HETEROGENEOUS EXPECTATIONS AND PLANNING PERIODS 309
TAXES 309
EMPIRICAL TESTS OF THE CAPM 310
STABILITY OF BETA 310
COMPARABILITY OF PUBLISHED ESTIMATES OF BETA 311
RELATIONSHIP BETWEEN SYSTEMATIC RISK AND RETURN 312
EFFECT OF SKEWNESS ON THE RELATIONSHIP 314
EFFECT OF SIXE，PE，AND LEVERAGE 314
EFFECT OF BOOK-TO-MARKET VALVE:THE FAMA-FRENCH STUDY 315
SUMMARY OF CAPM RISK-RETURN EMPIRICAL RESULTS 315
THE MARKET PORTFOUO: THEORY VERSUS PRACTICE 317
ARBITRAGE PRICING THEORY （APT） 322
EMPIRICAL TESTS OF THE APT 325
ROLL-ROSS STUDY 325
EXTENSIONS OF THE ROLL-ROSS TESTS 326
THE APT AND ANOMALIES 327
THE SHANKEN CHALLENGE TO TESTABILITY OF THE ATP 329
Chapter 11 333
An Introduction to Derivative Markets and Securities 333
OVERVIEW OF DERIVATIVE MARKETS 334
THE LANGUAGE AND STRUCTURE OF FORWATD AND FUTUTES MARKETS 334
THE LANGUAGE AND STRUCTURE OF OPTION MARKETS 336
INVESTING WITH DERIVATIVE SECURITIES 338
THE BASIC NATUTE OF DERIVATIVE INVESTING 338
BASIC PAYOFF DIAGRAMS FOR FORWARD CONTRACTS 340
BASIC PAYOFF DIAGRAMS FOR CALL AND PUT OPTIONS 341
OPTION PAYOFF DIAGRAMS：AN EXAMPLE 344
THE RELATIONSHIP BETWEN FORWARD AND OPTION CONTRACTS 347
PUT-CALL-SPOT PARITY 347
PUT-CALL PARITY：AN EXAMPLE 349
CREATING SYNTHETIC SECURTITES USING PUT-CALL PARITY 350
ADJUSTING PUT-CALL-CALL-SPOT PATITY FOR DIVIDENDS 351
PUT-CALL-FORWARD PARITY 352
APPLICATIONS OF DERIVATIVES IN PORTFOLIO MANAGEMENT 354
RESRTUCTURING ASSET PORTFOLIOS WITH FORWARD CONTRACTS 354
PROTECTING PORTFOLIO VALUE WITH PUT OPTIONS 356
ALTERING PORTFOLIO PAYOFFS WITH CALL OPTIONS 360
STATEMENT OF CASH FLOWS 370
3 Valuation principles and Practice 372
Analysis of Financial Statements 374
MAJOR FINANCIAL STATEMENTS 374
Chapter 12 374
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 375
BALANC SHEET 375
INCOME STATEMENT 375
ALTERNATIVE MEASURES OF CASH FLOW 380
PURPOSE OF FINANCIAL STATEMENT ANALYSIS 381
ANALYSIS OF FINANCIAL RATIOS 381
IMPORTANCE OF RELATIVE FINANCIAL RATIOS 381
COMPUTATION OF FINANCIAL RATIOS 383
COMMON SIXE STATEMENTS 383
EVALUATING INTERNAL LIQUIDITY 383
INTERNAL LIQUIDITY RATIOS 383
EVALUATING OPERATING PERFORMANCE 388
OPERATING EFFICIENCY RATIOS 389
OPERATING PROFITABILITY RATIOS 390
RISK ANALYSIS 396
BUSINESS RISK 398
FINANCLAL RISK 399
ANALYSIS OF GROWTH POTENTIAL 406
IMPORTANCE OF GROWTH ANALYSIS 406
DETERMINANTS OF GROWTH 406
EXTERNAL MARKET LIQUIDITY 408
MARKET LIQUIDITY DEFINED 408
DETERMINANTS OF MARKET LIQUIDITY 408
COMPARATIVE ANALYSIS OF RATIOS 409
INTERNAL LIQUIDITY 409
OPERATING PERFORMANCE 409
FINANCIAL RISK 409
ACCOUNTING STATEMENT FORMAT DIFFERENCES 411
GROWTH ANALYSIS 411
DIFFERENCES IN ACCOUNTING PRINCIPLES 411
ANALYSIS OF NON-U.S. FINANCIAL STATEMENTS 411
INTERNATIONAL RATIO ANALYSIS 412
THE QUALITY OF FINANCIAL STATEMENTS 417
BALANCE SHEET 417
INCOME STATEMENT 418
THE VALUE OF FINANCIAL STATEMENT ANALYSIS 418
USES OF FINANCIAL RATIOS 418
STOCK VALUATION MODELS 419
FINANCIAL RATIOS AND SYSTEMATIC RISK 419
FIANCIAL RATIOS AND BOND RATINGS 420
LIMITATIONS OF FINANCIAL RATIOS 421
FINANCIAL RATIOS AND TNSOLVENCY（BANKRUPTCY） 421
An Introduction to Security Valuation 429
Chapter 13 429
AN OVERVIEW OF THE VALUATION PROCESS 430
GENERAL ECONOMIC INFLUENCES 431
WHY A THREE-STEP VALUATION PROCESS? 431
INDUSTRY INFLUENCES 432
COMPANY ANALYSIS 433
DOES THE THREE-STEP PROCESS WORK? 433
THEORY OF VALUATION 434
STREAM OF EXPECTED RETURNS 434
REQUIRED RATE OF RETURN 435
INVESTMENT DECISION PROCESS：A COMPARISON OF ESTIMATED VALUES AND MARKET PRICES 435
VALUATION OF ALTERNATIVE INVESTMENTS 436
VALUATION OF BONADS 436
VALUATION OF PREFERRED STOCK 437
VALUATION OF COMMON STOCK 438
INFINITE PERIOD DDM AND GROWTH COMPANIES 443
VALUATION WITH TEMPORARY SUPERNOFMAL GROWTH 443
EARNINGS MULTIPLIER MODEL 445
REQUIRED RATE OF RETURN（K） 447
OF DIVIDENDS 447
ESTIMATING THE REQUIRED RETURN FOR FOREIGN SECURTIES 449
EXPECTED GROWTH RATE OF DIVIDENDS 453
ESTIMATING DIVIDEND GROWTH FOR FOREIGN STOCKS 455
Derivation Of Constant Growth Dividend Discount Model（DDM） 458
Chapter 13 APPENDIX 458
Allocation Decision 460
Chapter 14 460
CYCLICAL INDICATOR APPROACH TO 461
ECONOMIC ACTIVITY AND SECURITY MARKETS 461
FORECASTING THE ECONOMY 462
CYCLIAL INDICATOR CATEGORIES 463
ANALYTICAL MAESURES OF PERFORMANCE 466
LIMITIONS OF THE CYCLCAL INDICATOR APPROACH 466
LEADING INDICTORS AND STOCK PRICES 467
OTHER LEADING INDICATOR SERIES 467
MONEY SUPPLY AND THE ECONOMY 470
MONETARY VARIABLES， THE ECONOMY，AND STOCK PRICES 470
MONEY SUPPLY AND STOCK PRICES 471
OTHER ECONOMIC VARIABLES AND STOCK PRICES 472
INFLATION，I NTEREST RATES，AND SECURITY PRICES 473
SUMMARY OF MACROECONOMIC ANALYSIS 476
ANALYSIS OF WORLD SECURITY MARKETS 477
INFLATION AND EXCHANGE RATES 477
CORRELATIONS AMONG RETURNS 479
INDIVIDUAL COUNTRY STOCK PRICE CHANGES 480
INDIVIDUAL COUNTRY ANALYSIS 480
WORLD ASSET ALLOCATION 482
Part 4 Analysis and Management of Bonds 488
Chapter 15 490
Bond Fundamentals 490
BASIC FEATURES OF A BOND 490
BOND CHARACTERISTICS 491
RATES OF RETURN ON BONDS 493
THE GLOBAL BOND-MARKET STRUCTURE 494
PARTICIPATING ISSUERS 495
PARTICIPATING INVESTORS 497
BOND RATINGS 497
ALTERNATIVE BOND ISSUES 500
DOMESTIC GOVERNMENT BONDS 500
GOVERNMENT AGENCUY ISSUES 502
MUNICIPAL BONDS 505
CORPORATE BONDS 507
INTERNATIONAL BONDS 516
INETRPRETING BOND QUOTES 517
OBTAINING INFORMATION ON BOND PRICES 517
Chapter 16 525
The Analysis and Valuation of Bonds 525
THE FUNDAMENTALS OF BOND VALUATION 526
THE PRESENT VALUE MODEL 526
THE YIELD MODEL 528
COMPUTING BOND YIELDS 529
NOMONAL YIELD 530
CURRENT YIELD 530
PROMISE YIELD TO MATURITY 530
PROMISED YIELD TO CALL 534
REALIZED（HORIZON）YIELD 535
CALCULATING FUTURE BOND PRICES 536
REALIZED（HORIZON）YIELD WITH DIFFRENTIAL 538
REINVESTMNT RATES 538
PRICE AND YIELD DETERMINATION NONINTEREST DATES 540
YIELD ADJUSTMENTS FOR TAX-EXEMPT BONDS 540
BOND YIELD BOOK 541
BOND VALUATION USING SPOT RATES 541
WHAT DETERMINES INTEREST RATES? 543
FORECASTING INTEREST RATES 544
FUNDAMENTAL DETERMINANTS OF INTEREST RATES 545
TERM STRUCTURS OF INTRET RATES 548
CALCULATING FORWARD RATES FROM THE SPOT-RATE CURVE 554
TERM-STRUCTURE THEORIES 556
YIELD SPREADS 560
WHAT DETERMINES THE PRICE VOLATILITY FOR BONDS? 561
TRADING STRATEGIES 564
DURATION MEASURES 565
MODIFIED DURATION AND BOND PRICE VOLATILITY 568
BOND CONVEXITY 569
DURATION AND CONVEXITY FOR CALLABLE BONDS 576
LIMITATIONS OF MACAULAY AND MODIFIED DURATION 578
Chapter 17 591
Bond portfolio Management Strategies 591
ALTERNATIVE BOND PORTFOLIO STRATEGIES 591
PASSIVE MANAGEMENT STRTEGIES 592
ACTVE MANAGEMENT STRATEGIS 593
A GLOBAL FIXED-INCOME INVESTMENT STRATEGY 605
MATCHED-FUNDING IECHNIQUES 607
CONTINGENT PORTFOLIO STRATEGIES 616
IMPLICATIONS OF CAPITAL MARKET THEORY AND THE EMH ON BOND PORTFOLIO MANAGEMENT 623
BONDS AND TOTAL PORTFOLIO THEORY 623
BONDS AND CAPIAL MARKET THEORY 624
BOND PRICE BEHAVIOR IN A CAPM FRAMEWORK 624
BOND-MARKET EFFICIENCY 627
Part 5 Analysis of Common Stocks 638
Chapter 18 640
Stock-Market Analysis 640
APPLYING THE VALUATION MODEL TO THE MARKET 641
IMPORTANCE OF BOTH COMPONENTS OF VALUE 642
TWO-PART VALUATION PROCEDURE 642
ESTIMATING EXPECTED EARNINGS PER SHARE 645
ESTIMATING SALES PER SHARE FOR A MARKET SERIES 645
ESTIMATING GROSS NATIONAL PRODUCT 645
ALTERNATIVE ESTMATES OF CORPORATE NET PROFITS 647
ESTMATING AGGREGATE OPEPATING PROFIT MARGIN 648
ESTIMATING DEPRECIATION EXPEMSE 652
ESTIMATING INTEREST EXPENSE 652
ESTIMATING THE TAX RATE 653
CALCULATING EARNINGS PER SHARE：AN EXAMPLE 654
ESTIMATING THE EARNINGS MULTIPLIER FOR A STOCK-MARKET SERIES 655
DETERMINANTS OF THE EARNINGS MULTIPLIER 655
ESTIMATING AN EARNINGS MULTIPLIER：AN EXAMPLE 665
CALCULATING AN ESTIMATE OF THE VALUE FOR THE MARKET SERIES 669
CALCULATING THE EXPECTED RATE OF RETURN ON COMMON STOCKS 669
ANALYSIS OF WORLD MARKETS 671
INDIVIDUAL COUNTRY ANALYSIS 672
Chapter 19 679
Industry Analysis 679
WHY DO INDUSTRY ANALYSIS? 680
CROSS-SECTIONAL INDUSTRY PERFORMANCE 681
INDUSTRY PERFORMANCE OVER TIME 682
PERFORMANCE OF THE COMPANIES WITHIN AN INDUSTRY 682
DIFFERENCES IN INDUSTRY RISK 682
SUMMARY OF RESARCH ON INDUSTRY ANALYSIS 683
ESTIMATING INDUSTRY RATES OF RETURN 683
ESTIMATING EARNINGS PER SHARE 684
FORECASTING SALES PER SHARE 684
COMPETITION AND EXPECTED INDUSTRY RETLJRNS 689
BASIC COMPETITIVE FORCES 689
FORECASTING EARNINGS PER SHARE 689
INDUSTRY PROFIT MARGIN FORECAST 691
AN INDUSTRY EARNINGS ESTIMATE EXAMPLE 694
ESTIMATING AN INDUSTRY EARNINGS MULTIPLIER 696
MACROANAL OF AN INDUSTRY MULTIPLIER 697
MICROANALYSIS OF AN INDUSTRY 698
WHY THE DIFFENCE? 705
ESTIMATING THE FUTURE 705
GLOBAL INDUSTRY ANALYSIS 706
THE EUROPEAN CHEMICAL INDUSTRY 706
APPENDIX 19A 711
Preparing an Industry Analysis 711
Chapter 20 711
ESTIMATING THE COMPANY PROFIT MARGIN 712
Company Analysis and stock Selection 714
GROWTH COMANIES AND GROWTH STOCKS 715
ANALYSIS OF COMPANIES VERSUS THE SELECTION OF STOCK 715
OTHER COMPANY-STOCK COMPARISONS 716
ESTIMATING THE VALUE OF A COMPANY 717
ESTIMATING COMPANY EARNINGS PER SHARE 718
COMPANY SALES FORECAST 718
IDENTIFYING AND SELECTING COMPETITIVESTRATEGIES 721
LOW-COST STRATEGY 722
DIFFERENTIATION STRATEGY 722
FOCUSING A STRATEGY 722
WALGREEN COMPETITIVE STRATEGIES 722
THE INTERNAL PERFORMANCE 723
MACROANALYSIS OF THE EARNINGS MULTIPLER 726
ESTIMATING COMPANY EARNINGS MULTIPLIERS 726
MICROANALYSIS OF THE EARINGS MULTIPLIER 727
MAKING THE INVESTMENT DECISION 732
ADDITIONAL MEASURES OF RELATIVE VALUE 734
PRICE/BOOK VALVE (P/BV) RATIO 735
PRICE/CASH FLOW (P/CF) RATIO 738
MEASURES OF VALUE-ADDED 739
ECONOMIC VALUE-ADDED(EVA) 740
MARKET VALUE-ADDED(MVA) 742
RELATIONSHIPS BETWEEN EVA AND MVA 742
THE FRANCHISE FACTOR 742
GLOBAL COMPANY ANALYSIS 743
EARNINGS PER SHARE ANALYSIS 743
PROFITABILITY AND FINANCIAL STRENGTH 744
COMMON STOCK STATISTOCS 744
SHARE PRICE PERFORMANCE 746
INDIVIDUAL COMPANY ANALYSIS 747
ANALYSIS OF GROWTH COMPANIES 747
ACW RETURNS ABOVE EXPECTED RETURNS 749
GROWTH COMPANY DEFINED 749
GROWTH COMPANIES AND GROWTH STOCKS 750
GROWTH COMPANIES AND THE DIVIDEND DISCOUNT MODEL 750
ALTERNATIVE GROWTH MODELS 750
No-GROWTH FIRM 750
LONG-RUN GROWTH MODELS 751
THE REAL WORLD 754
GROWTH DURATION 754
A FLEXIBLE GROWTH STOCK VALUATION MODEL 758
AN EXAMPLE OF THE FLEXBLE GROWTH MODEL 760
Chapter 21 771
Technical Analysis 771
UNDERLYING ASSUMPTIONS 0F TECHNICAL ANALYSIS 772
CHALLENGES TO TECHNICAL ANALYSIS 774
CHALLENGES TO TECHNICAL ANALYSIS ASSUMPTIONS 774
CHALLENGES TO TECHNICAL TRADING RULES 774
ADVANTAGES OF TECHNICAL ANALYSIS 775
TECHNICAL TRADING RULES AND INDICATORS 776
CONTRARY-OPINION RULES 777
FOLLOW THE SMART MONEY 781
OTHER MARKET ENVIRONMENT INDICATORS 784
STOCK PRICE AND VOLUME TECHNIQUES 788
TECHINCAL ANALYSIS OF FOREIGN MARKETS 795
TECHNICAL ANALYSIS OF BOND MARKETS 797
Chapter 22 802
Equity Portfolio Management Strategies 802
PASSIVE VERSUS ACTIVE MANAGEMENT 802
AN OVERVIEW OF PASSIVE EQUITY PORTFOLIO MANAGEMENT STRATEGIES 803
INDES FUND CONSTUCTION TECHNIQUES 804
AN OVERVIEW OF ACTIVE EQUITY PORTFOLIO MANAGEMENT STRATEGIES 805
USING FUTURES AND OPTIONS IN EQUITY PORTFOLIO MANAGEMENT 810
MODIFYING PORTFOLIO RISK AND RETURN：A REVIEW 810
THE USE OF FUTURES IN ASSET ALLOCATION 812
THE USE OF DERIVATIVES IN EQUITY PORTFOLIOS 812
HEDGING PORTFOLIO INFLOWS 812
THE STANDARD POOR’S 500 INDEX FUTURES CONTRACT 814
HEDGING PORTFOLIO OUTFLOWS 814
USING FUTURES IN PASSIVE EQUITY PORTFOLIO MANAGEMENT 816
USING FUTURES IN ACTIVE EQUITY PORTFOLIO MANAGEMENT 817
MODIFYING THE CHARACTERISTICS OF AN INTERNATIONAL EQUTY PORTFOLIO 818
STRATEGIC ASSET ALLOCATION 819
INTEGRATED ASSET ALLOCATION 819
TACTICAL ASSET ALLOCATION 819
ASSET ALLOCATON STRATEGIES 819
INSURED ASSET ALLOCATION 820
SELECTING AN ALLOCATION METHOD 820
Chapter 823
6 Derivative Security Analysis 824
Part 824
Forward and Futures Contracts 826
AN OVERVIEW OF FORWAD AND FUTURES TRADING 827
HEDGING WITH FORWARDS AND FUTRES 830
HEDGING AND THE BASIS 830
CALCULATING THE OPTIMAL HEDGE RATIO 832
FORWARD AND FUTURES CONTRACTS：BASIC VALUATION CONCEPTS 834
VALUING FORWARDS AND FUTURES 834
THE RELATIONSHIP BETWEEN SPOT AND FORWARD PRICES 835
FINANCIAL FORWARDS AND FUTURES： APPLICATIONS AND STRATEGIES 837
INEREST RATE FORWARDS AND FUTURES 837
LONG-TERM INTREST RATE FUTURES 838
SHORT-TERM INTEREST RATE FUTURES 843
STOCK INDEX FUTURES 849
CURRENCY ROFWARDS AND FUTURES 854
APPENDIX 23A 867
A Closed-Form Equation for Calculating Duration 867
APPENDIX 23B 868
Calculating Money Market Implied Forward Rates 868
Chapter 24 872
Option Contracts 872
AN OVERVIEW OF OPTION MARKETS AND CONTRACTS 873
OPTION MARKET CONVENTIONS 873
PRICE QUOTATIONS FOR EXCHANGE-TRADED OPTIONS 874
OPTION TRADING STRATEGIES 880
STRADDLES，STRIPS，AND STRAPS 881
STRANGLES 883
SPREDS 884
CHOOSER OPTIONS 884
RANGE FORWARDS 887
THE BASIC APPROACH 889
THE FUNDAMENTALS OF OPTION VALUATION 889
IMPROVING FORECAST ACCURACY 891
THE BINOMIAL OPTION PRICING MODEL 893
THE BLACK-SCHOLES VALUATION MODEL 897
ESTIMATING VOLATILITY 900
OPTION VALUATION：EXTENSIONS AND ADVANCED TOPICS 902
VALUING EUROPEAN-STYLE PUT OPTIONS 902
VALUING OPTIONS ON DIVIDEND-BEARING SECURITIES 903
VALUING AMERICAN-STYLE OPTIONS 905
OTHER EXTENSIONS OF THE BLACK-SCHOLES MODEL 907
Chapter 25 916
Swap Contracts，Convrertible Securities,and Other Embedded Derivative5 916
OTC INTEREST RATE AGREEMENTS 917
FORWARD RATE AGREEMENTS 917
INTEREST RATE SWAPS 919
CAPS AND FLOORS 925
COLLARS 926
SWAP OPTIONS （“SWAPTIONS”） 928
SWAP CONTRACTING EXTENSIONS 931
CURRENCY SWAPS 931
EQUITY INDEX-LINKED SWAPS 935
COMMODITY SWAPS 937
WARRANTS AND CONVERTBLE SECURITIES 939
WARRANTS 939
CONVERTIBLE SECURITIES 941
CONVERTIBLE PREFERRED STOCK 941
CONVERTIBLE BONDS 942
OTHER EMBEDDED DERIVATIVES 945
DUAL CURRENCY BONDS 947
EQUITY INDES-LINKED NOTES 948
COMMODITY-LINKED BULL AND BEAR BONDS 952
SWAP-LINKED NOTES 953
Part 964
7 Investment Companies and Evaluating Portfolio Performance 964
Chapter 26 966
Investment Companies 966
WHAT IS AN INVESTMENT COMPANY? 967
MANAGEMENT OF INVESTMENT COMPANIES 967
CLOSED-END VERSUS OPEN-END INVESTMENT COMPANIES 968
CLOSED-END INVESTMENT COMPANIES 968
OPEN-END INVESTMENT COMPANIES 971
FUND MANAGEMENT FEES 973
TYPES OF INVESTMENT COMPANIES BASED ON PORTFOLIO MAKEUP 973
COMMON STOCK FUNDS 973
BALANCED FUNDS 973
BOND FUNDS 973
BREAKDOWN BY FUND CHARACTERISTICS 974
MONEY MARKET FUNDS 974
PERFORMANCE OF INVESTMENT COMPANIES 976
ANALYSIS OF OVERALL PERFORMANCE 976
IMPACT OF FUND OBJECTIVES 977
MARKET TIMING ABILITY 978
CONSISTENCY OF PERFORMANCE 979
WHAT PERFORMANCE STUDIES MEAN TO YOU 980
SOURCES OF lNFORMATION 981
GLOBAL INVESTMENT COMPANIES 990
Chapter 27 993
Evaluation of Portfolio Performance 993
WHAT IS REQUIRED OF A PORTFOLIO MANAGER? 994
COMPOSITE PORTFOLIO PERFORMANCE MEASURES 995
PORTFOLIO EVALUATION BEFORE 1960 995
TREYNOR PORTFOLIO PERFORMANCE MEASURE 995
SHAPPE PORTFOLIO PERFORMANCE MEASUE 998