Institutional Investment Management : Equity and Bond Portfolio Strategies and Applications

by Fabozzi, Frank J.

• ISBN13: 9780470400944
• ISBN10: 0470400943
• Edition: 1st
• Format: Hardcover
• Copyright: 2009-10-05
• Publisher: Wiley

Summary

This comprehensive handbook of investment management theories, concepts, and applications begins with Fabozzi offering readers an overview of the financial markets and investments, as well as a look at institutional investors and their objectives. He then discusses the following, in detail: Portfolio Theory and Asset Pricing; Common Stock Analysis and Portfolio Management; Fixed Income Analysis and Portfolio Management, Mutual Funds, Exchange-Traded Funds, and Alternative Investments; and Asset Allocation and Performance Evaluation. Fabozzi offers applications of these theories and concepts throughout, with a focus on fixed income products and derivatives. He also provides appendix material on statistical concepts with a review of an income statement and balance sheet. All of this information is presented in such fashion tailored to fit both the needs of the learning professional and student alike.

Author Biography

Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance and Becton Fellow at Yale University's School of Management, Editor of the Journal of Portfolio Management, and Associate Editor of the Journal of Structured Finance and the Journal of Fixed Income.

Table of Contents

Preface

Acknowledgments

About the Author

Overview of Investment Management

Setting Investment Objectives

Establishing an Investment Policy

Selecting a Portfolio Strategy

Constructing and Monitoring the Portfolio

Measuring and Evaluating Performance

References

Portfolio Theory and Asset Pricing

Theory of Portfolio Selection

Some Basic Concepts

Measuring a Portfolio's Expected Return

Measuring Portfolio Risk

Portfolio Diversification

Choosing a Portfolio of Risky Assets

Index Model's Approximations to the Covariance Structure

Summary

References

Applying Mean-Variance Analysis

Using Historical Data to Estimate Inputs

Application of Portfolio Theory to Asset Allocation

Implementing the Optimal Portfolio

Summary

References

Issues in the Theory of Portfolio Selection

Quick Review of Probability Theory

Limitations of the Variance as a Risk Measure

Desirable Features of Investment Risk Measures

Alternative Risk Measures for Portfolio Selection

Extensions of the Theory of Portfolio Selection

Behavioral Finance Attack on the Theory of Portfolio

Summary

References

Asset Pricing Theories

Characteristics of an Asset Pricing Model

Capital Asset Pricing Model

Arbitrage Pricing Theory Model

Some Principles to Take Away

Summary

Appendix

References

Common Stock Analysis and Portfolio Management

The U.S. Equity Markets

Exchange Market Structures

The U.S. Stock Markets Exchanges and OTC Markets

Off-Exchange Markets and Alternative Electronic Markets

Evolving Stock Market Practices

Basic Functioning of Stock Markets

Summary

References

Common Stock Strategies and Performance Evaluation

Market Efficiency

Stock Market Indicators

Top-Down vs. Bottom-Up Approaches

Fundamental vs. Technical Analysis

Strategies Based on Technical Analysis

Strategies Based on Fundamental Analysis

Equity Style Investing

Passive Strategies

Measuring and Evaluating Performance

Summary

References

Financial Analysis

Financial Ratio Analysis

Cash Flow Analysis

Usefulness of Cash Flows in Financial Analysis

Summary

References

Applied Equity Valuation

Discounted Cash Flow Models

Relative Valuation Methods

DCF vs. RV Methods

Summary

References

Forecasting Stock Returns

The Concept of Predictability

A Closer Look at Pricing Models

Predictive Return Models

Is Forecasting Markets Worth the Effort?

Summary

References

Managing a Common Stock Portfolio with Fundamental Factor Models

Tracking Error

Fundamental Factor Model Description and Estimation

Risk Decomposition

Applications in Portfolio Construction and Risk Control

Summary

References

Transaction Costs and Trade Execution in Common Stock Portfolio Management

Trading Mechanics

Trading Arrangements for Institutional Investors

A Taxonomy of Transaction Costs

Liquidity and Transaction Costs

Market Impact Measurements and Empirical Findings

Forecasting and Modeling Market Impact

Incorporating Transaction Costs in Asset-Allocation Models

Optimal Trading

Integrated Portfolio Management Beyond Expected Return and Portfolio Risk

Summary

References

Using Stock Index Futures and Equity Swaps in Equity Portfolio Management

Derivatives Process

Basic Features of Futures Contracts

Basic Features of Stock Index Futures

Applications for Stock Index Futures

Equity Swaps

Summary

References

Using Equity Options in Investment Management

Basic Features of Options

Basic Features of Listed Equity Options

Risk and Return Characteristics of Listed Options

The Option Price

Use of Listed Equity Options in Portfolio Management

OTC Equity Options The Basics

Use of Exotic Equity Options

Summary

References

Equity Option Pricing Models

Put-Call Parity Relationship

Option Pricing Models

Sensitivity of the Option Price to a Change in Factors

Estimating Expected Stock Return Volatility

Summary

References

Bond Analysis and Portfolio Management

Bond Fundamentals and Risks

Features of Bonds

Risks Associated with Investing in Bonds

Summary

Appendix Calculating Accrued Interest

References

Treasury and Agency Securities, Corporate Bonds, and Municipal Bonds

Treasury Securities

Federal Agency Securities

Corporate Bonds

Municipal Bonds

Non-U.S. Bonds

Summary

References

Structured Products RMBS, CMBS, and ABS

Agency Residential Mortgage-Backed Securities

Private-Label Residential MBS

Mortgage-Related, Asset-Backed Securities Subprime MBS

Commercial Mortgage-Backed Securities

Nonmortgage Asset-Backed Securities

Summary

References

The Structure of Interest Rates

The Base Interest Rate

The Risk Premium Between Non-Treasury and Treasury Securities with the Same Maturity

Factors Affecting the Risk Premium

Term Structure of Interest Rates

Summary

References

Bond Pricing and Yield Measures

Pricing of Option-Free Bonds

Conventional Yield Measures

Portfolio Yield Measures

Total Return

Summary

Bond Price Volatility and the Measurement of Interest Rate Risk

Price Volatility Properties of Option-Free Bonds

Factors that Affect a Bond's Price Volatility

Measuring Interest Rate Risk Using the Price Value of a Basis Point

Measuring Interest Rate Risk Using Duration and Convexity

Measuring Exposure to Yield Curve Changes Key Rate Duration

Summary

References

Valuing Bonds with Embedded Options

The Interest Rate Lattice

Calibrating the Lattice

Using the Lattice for Valuation

Using the Lattice Model to Value Bonds with Embedded Options

Extensions

Summary

References

Bond Portfolio Strategies

Bond Market Indexes

The Spectrum of Strategies

Value-Added Strategies

Using Factor Models to Manage a Portfolio

Liability-Driven Strategies

Summary

References

Using Derivatives in Bond Portfolio Management

Using Treasury Bond and Note Futures Contracts in Bond Portfolio Management

Use of Interest Rate Options in Bond Portfolio Management

Using Interest Rate Swaps in Bond Portfolio Management

Using Stock Index Futures and Treasury Bond Futures to Implement an Asset Allocation Decision

Using Credit Default Swaps to Manage Credit Risk

Summary

References

Investment Companies, Exchange-Traded Funds, and Alternative Investments

Investment Companies, Exchange-Traded Funds, and Investment-Oriented Life Insurance

Investment Companies

Exchange-Traded Funds

Investment-Oriented Life Insurance

Summary

References

Alternative Assets

Hedge Funds

Private Equity

Commodity Investments

Summary

References

Appendix

Measuring and Forecasting Yield Volatility

Calculating the Standard Deviation from Historical Data

Modeling and Forecasting Yield Volatility

Summary

References

Index

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