Investments

by Bodie, Zvi; Kane, Alex; Marcus, Alan J.

• ISBN13: 9780072861785
• ISBN10: 0072861789
• Format: Hardcover
• Copyright: 2003-12-01
• Publisher: McGraw-Hill College

Summary

Prepared by Bruce Swenson of Adelphi University, provides detailed solutions to the end of chapter problems. This manual is available bundled with the text for students to purchase by permission of the instructor by ordering ISBN 0072976322.

Table of Contents

PART ONE INTRODUCTION	1	(134)
CHAPTER 1 THE INVESTMENT ENVIRONMENT	3	(28)
1.1 Real Assets versus Financial Assets	4	(2)
1.2 Financial Markets and the Economy	6	(5)
Consumption Timing	6	(1)
Allocation of Risk	6	(1)
Separation of Ownership and Management	7	(1)
A Crisis in Corporate Governance	8	(3)
Accounting Scandals	8	(2)
Analyst Scandals	10	(1)
Initial Public Offerings	11	(1)
1.3 Clients of the Financial System	11	(3)
The Household Sector	12	(1)
The Business Sector	12	(1)
The Government Sector	13	(1)
1.4 The Environment Responds to Clientele Demands	14	(6)
Financial Intermediation	14	(2)
Investment Banking	16	(1)
Financial Innovation and Derivatives	17	(1)
Response to Taxation and Regulation	18	(2)
1.5 Markets and Market Structure	20	(1)
1.6 Ongoing Trends	21	(4)
Globalization	21	(1)
Securitization	22	(2)
Financial Engineering	24	(1)
Computer Networks	25	(1)
Summary	25	(1)
Key Terms	26	(1)
Websites	26	(1)
Problems	27	(2)
Standard and Poor's	29	(1)
E-Investments: Track Your Portfolio	29	(1)
Solutions to Concept Checks	30	(1)
CHAPTER 2 FINANCIAL INSTRUMENTS	31	(34)
2.1 The Money Market	32	(3)
Treasury Bills	32	(1)
Certificates of Deposit	33	(1)
Commercial Paper	33	(1)
Bankers' Acceptances	33	(1)
Eurodollars	34	(1)
Repos and Reverses	34	(1)
Federal Funds	34	(1)
Brokers' Calls	35	(1)
The LIBOR Market	35	(1)
Yields on Money Market Instruments	35	(1)
2.2 The Bond Market	35	(9)
Treasury Notes and Bonds	36	(1)
Federal Agency Debt	36	(2)
International Bonds	38	(1)
Municipal Bonds	39	(2)
Corporate Bonds	41	(1)
Mortgages and Mortgage-Backed Securities	42	(2)
2.3 Equity Securities	44	(3)
Common Stocks as Ownership Shares	44	(1)
Characteristics of Common Stock	45	(1)
Stock Market Listings	46	(1)
Preferred Stock	47	(1)
2.4 Stock and Bond Market Indexes	47	(7)
Stock Market Indexes	47	(1)
Dow Jones Averages	48	(3)
Standard & Poor's Indexes	51	(1)
Other U.S. Market-Value Indexes	52	(1)
Equally Weighted Indexes	52	(1)
Foreign and International Stock Market Indexes	53	(1)
Bond Market Indicators	53	(1)
2.5 Derivative Markets	54	(4)
Options	54	(3)
Futures Contracts	57	(1)
Summary	58	(1)
Key Terms	59	(1)
Websites	59	(1)
Problems	60	(3)
Standard and Poor's	63	(1)
E-Investments: Security Prices and Returns	63	(1)
Solutions to Concept Checks	63	(2)
CHAPTER 3 HOW SECURITIES ARE TRADED	65	(42)
3.1 How Firms Issue Securities	66	(5)
Investment Bankers and Underwriting	66	(2)
Shelf Registration	68	(1)
Private Placements	68	(1)
Initial Public Offerings	68	(3)
3.2 Where Securities Are Traded	71	(6)
The Secondary Markets	72	(1)
The Over-the-Counter Market	73	(2)
The Third and Fourth Markets	75	(1)
The National Market System	76	(1)
Bond Trading	77	(1)
3.3 Trading on Exchanges	77	(5)
The Participants	77	(1)
Types of Orders	78	(2)
Market Orders	78	(1)
Limit Orders	78	(2)
Specialists and the Execution of Trades	80	(1)
Block Sales	81	(1)
The SuperDOT System	82	(1)
Settlement	82	(1)
3.4 Trading on the OTC Market	82	(4)
Market Structure in Other Countries	84	(1)
London	84	(1)
Euronext	84	(1)
Tokyo	85	(1)
Globalization of Stock Markets	85	(1)
3.5 Trading Costs	86	(2)
3.6 Buying on Margin	88	(3)
3.7 Short Sales	91	(3)
3.8 Regulation of Securities Markets	94	(5)
Government Regulation	94	(1)
Regulatory Responses to Recent Scandals	95	(1)
Self-Regulation and Circuit Breakers	96	(2)
Insider Trading	98	(1)
Summary	99	(1)
Key Terms	100	(1)
Websites	100	(1)
Problems	101	(4)
Standard and Poor's	105	(1)
E-Investments: Short Sales	105	(1)
Solutions to Concept Checks	105	(2)
CHAPTER 4 MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES	107	(28)
4.1 Investment Companies	108	(1)
4.2 Types of Investment Companies	109	(3)
Unit Investment Trusts	109	(1)
Managed Investment Companies	109	(2)
Other Investment Organizations	111	(1)
Commingled Funds	111	(1)
Real Estate Investment Trusts (REITS)	111	(1)
Hedge Funds	111	(1)
4.3 Mutual Funds	112	(4)
Investment Policies	112	(1)
Money Market Funds	112	(1)
Equity Funds	112	(1)
Bond Funds	113	(1)
International Funds	113	(1)
Balanced and Income Funds	113	(1)
Asset Allocation and Flexible Funds	113	(1)
Index Funds	113	(2)
How Funds Are Sold	115	(1)
4.4 Costs of Investing in Mutual Funds	116	(3)
Fee Structure	116	(1)
Front-End Load	116	(1)
Back-End Load	116	(1)
Operating Expenses	116	(1)
2b-1 Charges	116	(1)
Fees and Mutual Fund Returns	117	(2)
4.5 Taxation of Mutual Fund Income	119	(1)
4.6 Exchange-Traded Funds	120	(2)
4.7 Mutual Fund Investment Performance: A First Look	122	(3)
4.8 Information on Mutual Funds	125	(4)
Summary	129	(1)
Key Terms	129	(1)
Websites	130	(1)
Problems	131	(2)
Standard and Poor's	133	(1)
E-Investments: Choosing a Mutual Fund	133	(1)
Solutions to Concept Checks	133	(2)
PART TWO PORTFOLIO THEORY	135	(144)
CHAPTER 5 HISTORY OF INTEREST RATES AND RISK PREMIUMS	137	(28)
5.1 Determinants of the Level of Interest Rates	138	(4)
Real and Nominal Rates of Interest	138	(1)
The Equilibrium Real Rate of Interest	139	(1)
The Equilibrium Nominal Rate of Interest	140	(1)
Bills and Inflation, 1963-2002	141	(1)
Taxes and the Real Rate of Interest	142	(1)
5.2 Risk and Risk Premiums	142	(2)
5.3 The Historical Record	144	(6)
Bills, Bonds, and Stocks, 1926-2002	144	(6)
5.4 Real Versus Nominal Risk	150	(1)
5.5 Return Distributions and Value at Risk	151	(3)
5.6 A Global View of the Historical Record	154	(1)
5.7 Forecasts for the Long Haul	154	(2)
Summary	156	(1)
Key Terms	157	(1)
Websites	157	(1)
Problems	158	(4)
Standard and Poor's	162	(1)
E-Investments: Analytics Tutorial	162	(1)
Solutions to Concept Checks	162	(1)
Appendix: Continuous Compounding	162	(3)
CHAPTER 6 RISK AND RISK AVERSION	165	(32)
6.1 Risk and Risk Aversion	166	(7)
Risk with Simple Prospects	166	(1)
Risk, Speculation, and Gambling	167	(1)
Risk Aversion and Utility Values	168	(5)
6.2 Portfolio Risk	173	(6)
Asset Risk versus Portfolio Risk	173	(1)
A Review of Portfolio Mathematics	174	(60)
Rule 1	174	(1)
Rule 2	174	(1)
Rule 3	175	(1)
Rule 4	175	(3)
Rule 5	178	(1)
Summary	179	(1)
Key Terms	179	(1)
Websites	179	(1)
Problems	180	(2)
Standard and Poor's	182	(1)
E-Investments: Risk and Return	182	(1)
Solutions to Concept Checks	182	(2)
Appendix A: A Defense of Mean-Variance Analysis	184	(7)
Appendix B: Risk Aversion. Expected Utility, and the St. Petersburg Paradox	191	(6)
CHAPTER 7 CAPITAL ALLOCATION BETWEEN THE RISKY ASSET AND THE RISK-FREE ASSET	197	(26)
7.1 Capital Allocation across Risky and Risk-Free Portfolios	198	(2)
7.2 The Risk-Free Asset	200	(1)
7.3 Portfolios of One Risky Asset and One Risk-Free Asset	201	(4)
7.4 Risk Tolerance and Asset Allocation	205	(5)
7.5 Passive Strategies: The Capital Market Line	210	(4)
Summary	214	(1)
Key Terms	214	(1)
Websites	215	(1)
Problems	215	(4)
Standard and Poor's	219	(1)
E-Investments: The S&P 500	219	(1)
Solutions to Concept Checks	219	(4)
CHAPTER 8 OPTIMAL RISKY PORTFOLIOS	223	(56)
8.1 Diversification and Portfolio Risk	224	(1)
8.2 Portfolios of Two Risky Assets	225	(9)
8.3 Asset Allocation with Stocks, Bonds, and Bills	234	(6)
The Ultimate Risky Portfolio with Two Risky Assets and a Risk-Free Asset	235	(5)
8.4 The Markowicz Portfolio Selection Model	240	(6)
Security Selection	240	(6)
8.5 The Spreadsheet Model	246	(8)
Calculation of Expected Return and Variance	246	(5)
Capital Allocation and the Separation Property	251	(2)
Asset Allocation and Security Selection	253	(1)
8.6 Optimal Portfolios with Restrictions on the Risk-Free Asset	254	(4)
Summary	258	(1)
Key Terms	259	(1)
Websites	259	(1)
Problems	260	(6)
E-Investments: Risk Comparisons	266	(1)
Solutions to Concept Checks	266	(3)
Appendix A: The Power of Diversification	269	(3)
Appendix B: The Insurance Principle: Risk-sharing versus Risk-Pooling	272	(2)
Appendix C: The Fallacy of Time Diversification	274	(5)
PART THREE EQUILIBRIUM IN CAPITAL MARKETS	279	(166)
CHAPTER 9 THE CAPITAL ASSET PRICING MODEL	281	(36)
9.1 The Capital Asset Pricing Model	281	(11)
Why Do All Investors Hold the Market Portfolio?	283	(2)
The Passive Strategy Is Efficient	285	(1)
The Risk Premium of the Market Portfolio	285	(1)
Expected Returns on Individual Securities	286	(3)
The Security Market Line	289	(3)
9.2 Extensions of the APM	292	(5)
The CAPM with Restricted Bon-owing: The Zero-Beta Model	293	(4)
Lifetime Consumption and the CAPM	297	(1)
9.3 The CAPM and Liquidity	297	(6)
Summary	303	(1)
Key Terms	304	(1)
Websites	304	(1)
Problems	304	(5)
Standard and Poor's	309	(1)
E-Investments: Beta Comparisons	309
Solutions to Concept Checks 3	10	(301)
Appendix: Demand for Stocks and Equilibrium Prices	311	(6)
CHAPTER 10 INDEX MODELS	317	(26)
10.1 A Single-Index Security Market	318	(8)
Systematic Risk versus Firm-Specific Risk	318	(3)
Estimating the Index Model	321	(3)
The Index Model and Diversification	324	(2)
10.2 The CAPM and the Index Model	326	(3)
Actual Returns versus Expected Returns	326	(1)
The Index Model and Realized Returns	326	(1)
The Index Model and the Expected Return-Beta Relationship	327	(2)
10.3 The Industry Version of the Index Model	329	(5)
Predicting Betas	333	(1)
10.4 Index Models and Tracking Portfolios	334	(2)
Summary	336	(1)
Key Terms	336	(1)
Websites	336	(1)
Problems	336	(4)
Standard and Poor's	340	(1)
E-Investments: Comparing Volatilities and Beta Coefficients	340	(1)
Solutions to Concept Checks	341	(2)
CHAPTER 11 ARBITRAGE PRICING THEORY AND MULTIFACTOR MODELS OF RISK AND RETURN	343	(26)
11.1 Multifactor Models: An Overview	344	(4)
Factor Models of Security Returns	344	(2)
A Multifactor Security Market Line	346	(2)
11.2 Arbitrage Pricing Theory	348	(7)
Arbitrage, Risk Arbitrage, and Equilibrium	349	(1)
Well-Diversified Portfolios	350	(1)
Beta and Expected Returns	351	(2)
The One-Factor Security Market Line	353	(2)
11.3 Individual Assets and the APT	355	(1)
The APT and the CAPM	356	(1)
11.4 A Multifactor APT	356	(2)
11.5 Where Should We Look for Factors?	358	(3)
11.6 A Multifactor CAPM	361	(1)
Summary	362	(1)
Key Terms	363	(1)
Websites	363	(1)
Problems	363	(4)
Standard and Poor's	367	(1)
E-Investments: APT versus CAPM	368	(1)
Solutions to Concept Checks	368	(1)
CHAPTER 12 MARKET EFFICIENCY AND BEHAVIORAL FINANCE	369	(46)
12.1 Random Walks and the Efficient Market Hypothesis	370	(3)
Competition as the Source of Efficiency	372	(1)
Versions of the Efficient Market Hypothesis	373	(1)
12.2 Implications of the EMH	373	(8)
Technical Analysis	373	(4)
Fundamental Analysis	377	(1)
Active versus Passive Portfolio Management	378	(2)
The Role of Portfolio Management in an Efficient Market	380	(1)
Resource Allocation	380	(1)
12.3 Event Studies	381	(3)
12.4 Are Markets Efficient?	384	(12)
The Issues	384	(2)
The Magnitude Issue	384	(1)
The Selection Bias Issue	385	(1)
The Lucky Event Issue	385	(1)
Weak-Form Tests: Patterns in Stock Returns	386	(2)
Returns over Short Horizons	386	(1)
Returns over Long Horizons	387	(1)
Predictors of Broad Market Returns	388	(1)
Semistrong Tests: Market Anomalies	388	(6)
The Small-Firm-in-January effect	389	(2)
The Neglected-Firm Effect and Liquidity Effects	391	(1)
Book-to-Market Ratios	391	(1)
Post-Earnings-Announcement Price Drift	392	(2)
Strong-Form Tests: Inside Information	394	(1)
Interpreting the Evidence	394	(2)
Risk Premiums or Inefficiencies?	394	(2)
Anomalies or Data Mining?	396	(1)
12.5 A Behavioral Interpretation	396	(5)
Information Processing	397	(1)
Forecasting Errors	397	(1)
Overconfidence	397	(1)
Conservatism	398	(1)
Sample-Size Neglect and Representativeness	398	(1)
Behavioral Biases 398
Framing	398	(1)
Mental Accounting	398	(1)
Regret Avoidance	399	(1)
Limits to Arbitrage	399	(1)
Fundamental Risk	399	(1)
Implementation Costs	400	(1)
Model Risk	400	(1)
Evaluating the Behavioral Critique	400	(1)
12.6 Mutual Fund Performance	401	(4)
So, Are Markets Efficient?	405	(1)
Summary	405	(1)
Key Terms	406	(1)
Websites	406	(1)
Problems	407	(6)
Standard and Poor's	413	(1)
E-Investments: Efficient Markets and Insider Trading	413	(1)
Solutions to Concept Checks	413	(2)
CHAPTER 13 EMPIRICAL EVIDENCE ON SECURITY RETURNS	415	(30)
13.1 The Index Model and the Single-Factor APT	416	(10)
The Expected Return-Beta Relationship	416	(2)
Setting Up the Sample Data	417	(1)
Estimating the SCL	417	(1)
Estimating the SML	417	(1)
Tests of the CAPM	418	(1)
The Market Index	419	(3)
Measurement Error in Beta	422	(2)
The EMH and the CAPM	424	(1)
Accounting for Human Capital and Cyclical Variations in Asset Betas	424	(2)
13.2 Tests of Multifactor CAPM and APT	426	(3)
A Macro Factor Model	426	(3)
13.3 The Fama-French Three-Factor Model	429	(3)
13.4 Time-Varying Volatility	432	(3)
13.5 The Equity Premium Puzzle	435	(3)
Expected versus Realized Returns	435	(2)
Survivorship Bias	437	(1)
13.6 Survivorship Bias and Tests of Market Efficiency	438	(3)
Summary	441	(1)
Key Terms	441	(1)
Websites	441	(1)
Problems	442	(2)
Standard and Poor's	444	(1)
E-Investments: Portfolio Theory	444	(1)
Solutions to Concept Checks	444	(1)
PART FOUR FIXED-INCOME SECURITIES	445	(124)
CHAPTER 14 BOND PRICES AND YIELDS	447	(40)
14.1 Bond Characteristics	448	(7)
Treasury Bonds and Notes	448	(2)
Accrued Interest and Quoted Bond Prices	450	(1)
Corporate Bonds	450	(2)
Call Provisions on Corporate Bonds	451	(1)
Convertible Bonds	452	(1)
Puttable Bonds	452	(1)
Floating-Rate Bonds	452	(1)
Preferred Stock	452	(1)
Other Issuers	453	(1)
International Bonds	453	(1)
Innovation in the Bond Market	453	(2)
Inverse Floaters	454	(1)
Asset-Backed Bonds	454	(1)
Catastrophe Bonds	454	(1)
Indexed Bonds	454	(1)
14.2 Bond Pricing	455	(4)
Bond Pricing between Coupon Dates	458	(1)
14.3 Bond Yields	459	(7)
Yield to Maturity	459	(3)
Yield to Call	462	(2)
Realized Compound Yield versus Yield to Maturity	464	(2)
14.4 Bond Prices over Time	466	(5)
Yield to Maturity versus Holding-Period Return	468	(1)
Zero-Coupon Bonds	468	(1)
After-Tax Returns	469	(2)
14.5 Default Risk and Bond Pricing	471	(7)
Junk Bonds	471	(1)
Determinants of Bond Safety	471	(3)
Bond Indentures	474	(1)
Sinking Funds	474	(14)
Subordination of Further Debt	475	(1)
Dividend Restrictions	475	(1)
Collateral	476	(1)
Yield to Maturity and Default Risk	477	(1)
Summary	478	(1)
Key Terms	479	(1)
Websites	479	(1)
Problems	480	(5)
Standard and Poor's	485	(1)
E-Investments: Credit Spreads	485	(1)
Solutions to Concept Checks	485	(2)
CHAPTER 15 THE TERM STRUCTURE OF INTEREST RATES	487	(32)
15.1 The Term Structure Under Certainty	488	(7)
Bond Pricing	488	(3)
Bond Stripping and Pricing of Coupon Bonds	491	(1)
Holding-Period Returns	492	(1)
Forward Rates	493	(2)
15.2 Interest Rate Uncertainty and Forward Rates	495	(2)
15.3 Theories of the Term Structure	497	(1)
The Expectations Hypothesis	497	(1)
Liquidity Preference	497	(1)
15.4 Interpreting the Term Structure	498	(5)
15.5 Forward Rates as Forward Contracts	503	(2)
15.6 Measuring the Term Structure	505	(4)
Summary	509	(1)
Key Terms	509	(1)
Websites	509	(1)
Problems	510	(6)
E-Investments: Expectations and Term Spreads	516	(1)
Solutions to Concept Checks	516	(3)
CHAPTER 16 MANAGING BOND PORTFOLIOS	519	(50)
16.1 Interest Rate Risk	520	(11)
Interest Rate Sensitivity	520	(3)
Duration	523	(4)
What Determines Duration?	527	(4)
Rule 1 for Duration	528	(1)
Rule 2 for Duration	528	(1)
Rule 3 for Duration	528	(1)
Rule 4 for Duration	529	(1)
Rule 5 for Duration	529	(1)
Rule 6 for Duration	530	(1)
Rule 7 for Duration	530	(1)
Rule 8 for Duration	530	(1)
16.2 Convexity	531	(5)
Why Do Investors Like Convexity?	534	(1)
Duration and Convexity of Callable Bonds	534	(2)
16.3 Passive Bond Management	536	(11)
Bond-Index Funds	537	(1)
Immunization	538	(8)
Cash Flow Matching and Dedication	546	(1)
Other Problems with Conventional Immunization	546	(1)
16.4 Active Bond Management	547	(4)
Sources of Potential Profit	547	(1)
Horizon Analysis	548	(1)
Contingent Immunization	549	(2)
16.5 Interest Rate Swaps	551	(2)
Swaps and Balance Sheet Restructuring	552	(1)
The Swap Dealer	552	(1)
16.6 Financial Engineering and Interest Rate Derivatives	553	(2)
Summary	555	(1)
Key Terms	556	(1)
Websites	556	(1)
Problems	557	(9)
Standard and Poor's	566	(1)
E-Investments: Bond Calculations	566	(1)
Solutions to Concept Checks	566	(3)
PART FIVE SECURITY ANALYSIS	569	(126)
CHAPTER 17 MACROECONOMIC AND INDUSTRY ANALYSIS	571	(34)
17.1 The Global Economy	572	(2)
17.2 The Domestic Economy	574	(2)
17.3 Demand and Supply Shocks	576	(1)
17.4 Federal Government Policy	576	(3)
Fiscal Policy	577	(1)
Monetary Policy	578	(1)
Supply-Side Policies	579	(1)
17.5 Business Cycles	579	(6)
The Business Cycle	579	(2)
Economic Indicators	581	(4)
17.6 Industry Analysis	585	(10)
Defining an Industry	586	(1)
Sensitivity to the Business Cycle	587	(3)
Sector Rotation	590	(1)
Industry Life Cycles	591	(3)
Start-Up Stage	592	(1)
Consolidation Stage	592	(1)
Maturity Stage	592	(1)
Relative Decline	593	(1)
Industry Structure and Performance	594	(12)
Threat of Entry	594	(1)
Rivalry between Existing Competitors	594	(1)
Pressure from Substitute Products	594	(1)
Bargaining Power of Buyers	594	(1)
Bargaining Power of Suppliers	595	(1)
Summary	595	(1)
Key Terms	595	(1)
Websites	595	(1)
Problems	596	(6)
Standard and Poor's	602	(1)
E-Investments: The Macroeconomy	602	(1)
Solutions to Concept Checks	602	(3)
CHAPTER 18 EQUITY VALUATION MODELS	605	(50)
18.1 Valuation by Companies	606	(2)
Limitations of Book Value	607	(1)
18.2 Intrinsic Value versus Market Price	608	(1)
18.3 Dividend Discount Models	609	(13)
The Constant-Growth DDM	611	(3)
Convergence of Price to Intrinsic Value	614	(1)
Stock Prices and Investment Opportunities	615	(3)
Life Cycles and Multistage Growth Models	618	(4)
Multistage Growth Models	622	(1)
18.4 Price-Earnings Ratio	622	(12)
The Price-Earnings Ratio and Growth Opportunities	622	(4)
PIE Ratios and Stock Risk	626	(1)
Pitfalls in PIE Analysis	627	(4)
Combining P/E Analysis and the DDM	631	(1)
Other Comparative Valuation Ratios	632	(24)
Price-to-Book Ratio	632	(1)
Price-to-Cash-Flow Ratio	632	(1)
Price-to-Sales Ratio	633	(1)
18.5 Corporate Finance and the Free Cash Flow Approach	634	(2)
18.6 Inflation and Equity Valuation	636	(3)
18.7 The Aggregate Stock Market	639	(1)
Explaining Past Behavior	639	(1)
Forecasting the Stock Market	640	(2)
Summary	642	(1)
Key Terms	643	(1)
Websites	643	(1)
Problems	644	(7)
Standard and Poor's	651	(1)
E-Investments: Equity Valuation	652	(1)
Solutions to Concept Checks	652	(3)
CHAPTER 19 FINANCIAL STATEMENT ANALYSIS	655	(40)
19.1 The Major Financial Statements	656	(3)
The Income Statement	656	(1)
The Balance Sheet	657	(1)
The Statement of Cash Flows	658	(1)
19.2 Accounting versus Economic Earnings	659	(1)
19.3 Return on Equity	660	(4)
Past versus Future ROE	661	(1)
Financial Leverage and ROE	662	(2)
19.4 Ratio Analysis	664	(7)
Decomposition of ROE	664	(1)
Turnover and Other Asset Utilization Ratios	665	(2)
Liquidity and Coverage Ratios	667	(1)
Market Price Ratios	667	(3)
Choosing a Benchmark	670	(1)
19.5 Economic Value Added	671	(1)
19.6 An Illustration of Financial Statement Analysis	672	(2)
19.7 Comparability Problems	674	(6)
Inventory Valuation	674	(1)
Depreciation	675	(1)
Inflation and Interest Expense	676	(1)
Quality of Earnings	676	(3)
International Accounting Conventions	679	(1)
19.8 Value Investing: The Graham Technique	680	(1)
Summary	681	(1)
Key Terms	682	(1)
Websites	682	(1)
Problems	683	(9)
Standard and Poor's	692	(1)
E-Investments: Financial Statement Analysis	693	(1)
Solutions to Concept Checks	693	(2)
PART SIX OPTIONS, FUTURES, AND OTHER DERIVATIVES	695	(164)
CHAPTER 20 OPTIONS MARKETS: INTRODUCTION	697	(48)
20.1 The Option Contract	698	(7)
Options Trading	700	(2)
American and European Options	702	(1)
Adjustments in Option Contract Terms	702	(1)
The Option Clearing Corporation	702	(1)
Other Listed Options	703	(2)
Index Options	703	(2)
Futures Options	705	(1)
Foreign Currency Options	705	(1)
Interest Rate Options	705	(1)
20.2 Values of Options at Expiration	705	(6)
Call Options	705	(2)
Put Options	707	(2)
Option versus Stock Investments	709	(2)
20.3 Option Strategies	711	(8)
Protective Put	711	(2)
Covered Calls	713	(2)
Straddle	715	(1)
Spreads	716	(1)
Collars	716	(3)
20.4 The Put-Call Parity Relationship	719	(2)
20.5 Optionlike Securities	721	(7)
Callable Bonds	721	(2)
Convertible Securities	723	(2)
Warrants	725	(1)
Collateralized Loans	726	(1)
Levered Equity and Risky Debt	727	(1)
20.6 Financial Engineering	728	(3)
20.7 Exotic Options	731	(1)
Asian Options	731	(1)
Barrier Options	731	(1)
Lookback Options	731	(1)
Currency-Traded Options	731	(1)
Binary Options	732	(1)
Summary	732	(1)
Key Terms	732	(1)
Websites	732	(1)
Problems	733	(7)
Standard and Poor's	740	(1)
E-Investments: Options and Straddles	740	(1)
Solutions to Concept Checks	740	(5)
CHAPTER 21 OPTION VALUATION	745	(46)
21.1 Option Valuation: Introduction	746	(2)
Intrinsic and Time Values	746	(1)
Determinants of Option Values	747	(1)
21.2 Restrictions on Option Values	748	(4)
Restrictions on the Value of a Call Option	749	(2)
Early Exercise and Dividends	751	(1)
Early Exercise of American Puts	751	(1)
21.3 Binomial Option Pricing	752	(6)
Two-State Option Pricing	752	(3)
Generalizing the Two-State Approach	755	(3)
21.4 Black-Scholes Option Valuation	758	(9)
The Black-Scholes Formula	759	(6)
Dividends and Call Option Valuation	765	(1)
Put Option Valuation	766	(1)
21.5 Using the Black-Scholes Formula	767	(11)
Hedge Ratios and the Black-Scholes Formula	767	(3)
Portfolio Insurance	770	(4)
Hedging Bets on Mispriced Options	774	(4)
21.6 Empirical Evidence on Option Pricing	778	(1)
Summary	779	(1)
Key Terms	780	(1)
Websites	780	(1)
Problems	781	(6)
Standard and Poor's	787	(1)
E-Investments: Black-Scholes Option Pricing	788	(1)
Solutions to Concept Checks	788	(3)
CHAPTER 22 FUTURES MARKETS	791	(30)
22. The Futures Contract	792	(4)
The Basics of Futures Contracts	792	(4)
Existing Contracts	796	(1)
22.2 Mechanics of Trading in Futures Markets	796	(6)
The Clearinghouse and Open Interest	796	(3)
Marking to Market and the Margin Account	799	(2)
Cash versus Actual Delivery	801	(1)
Regulations	802	(1)
Taxation	802	(1)
22.3 Futures Markets Strategies	802	(4)
Hedging and Speculation	802	(3)
Basis Risk and Hedging	805	(1)
22.4 The Determination of Futures Prices	806	(5)
The Spot-Futures Parity Theorem	806	(3)
Spreads	809	(1)
Forward versus Futures Pricing	810	(1)
22.5 Futures Prices versus Expected Spot Prices	811	(2)
Expectation Hypothesis	811	(1)
Normal Backwardation	812	(1)
Contango	812	(1)
Modern Portfolio Theory	812	(1)
Summary	813	(1)
Key Terms	814	(1)
Websites	814	(1)
Problems	815	(2)
Standard and Poor's	817	(1)
E-Investments: Contract Specifications for Financial Futures and Options	818	(1)
Solutions to Concept Checks	818	(3)
CHAPTER 23 FUTURES AND SWAPS: A CLOSER LOOK	821	(38)
23.1 Foreign Exchange Futures	822	(7)
The Markets	822	(1)
Interest Rate Parity	822	(4)
Direct versus Indirect Quotes	826	(1)
Using Futures to Manage Exchange Rate Risk	826	(3)
23.2 Stock Index Futures	829	(8)
The Contracts	829	(1)
Creating Synthetic Stock Positions: An Asset Allocation Tool	830	(2)
Empirical Evidence on Pricing of Stock-Index Futures	832	(2)
Index Arbitrage and the Triple-Witching Hour	834	(1)
Using Index Futures to Hedge Market Risk	835	(2)
23.3 Interest Rate Futures	837	(3)
Hedging Interest Rate Risk	837	(2)
Other Interest Rate Futures	839	(1)
23.4 Commodity Futures Pricing	840	(4)
Pricing with Storage Costs	840	(3)
Discounted Cash Flow Analysis for Commodity Futures	843	(1)
23.5 Swaps	844	(5)
Swap Pricing	846	(1)
Credit Risk in the Swap Market	847	(1)
Swap Variations	848	(1)
Summary	849	(1)
Key Terms	850	(1)
Websites	850	(1)
Problems	851	(5)
Standard and Poor's	856	(1)
E-Investments: Describing Different Swaps	856	(1)
Solutions to Concept Checks	857	(2)
PART SEVEN ACTIVE PORTFOLIO MANAGEMENT	859	(146)
CHAPTER 24 PORTFOLIO PERFORMANCE EVALUATION	861	(44)
24.1 Measuring Investment Returns	862	(4)
Time-Weighted Returns versus Dollar-Weighted Returns	862	(1)
Arithmetic versus Geometric Averages	863	(3)
24.2 The Conventional Theory of Performance Evaluation	866	(11)
The M2 Measure of Performance (M'-)	869	(1)
Sharpe's Measure as the Criterion for Overall Portfolios	870	(1)
Appropriate Performance Measures in Three Sections	871	(3)
Jane's Portfolio Represents Her Entire Risky Investment Fund	871	(1)
Jane's Portfolio Is an Active Portfolio and Is Mixed with a Passive Market Index	872	(1)
Jane's Choice Portfolio Is One of Many Portfolios Combined into a Large Investment Fund	872	(2)
Relationships among the Various Performance Measures	874	(1)
Actual Performance Measurement: An Example	875	(1)
Realized Returns versus Expected Returns	875	(2)
24.3 Performance Measurement with Changing Portfolio Composition	877	(2)
24.4 Market Timing	879	(2)
24.5 Performance Attribution Procedures	881	(5)
Asset Allocation Decisions	883	(1)
Sector and Security Selection Decisions	884	(1)
Summing Up Component Contributions	885	(1)
24.6 Style Analysis	886	(3)
24.7 Morningstar's Risk-Adjusted Rating	889	(1)
24.8 Evaluating Performance Evaluation	890	(2)
Summary	892	(1)
Key Terms	893	(1)
Websites	893	(1)
Problems	894	(7)
Standard and Poor's	901	(1)
E-Investments: Performance of Mutual Funds	902	(1)
Solutions to Concept Checks	902	(3)
CHAPTER 25 INTERNATIONAL DIVERSIFICATION	905	(34)
25.1 Global Markets for Equities	906	(4)
Developed Countries	906	(1)
Emerging Markets	906	(2)
Market Capitalization and GDP	908	(2)
Home-Country Bias	910	(1)
25.2 Risk Factors in International Investing	910	(7)
Exchange Rate Risk	910	(4)
Country-Specific Risk	914	(3)
25.3 International Investing: Risk, Return, and Benefits from Diversification	917	(10)
Risk and Return: Summary Statistics	918	(1)
Are Investments in Emerging Markets Riskier?	918	(1)
Are Average Returns in Emerging Markets Greater?	918	(2)
Is Exchange Rate Risk Important in International Portfolios?	920	(1)
Benefits from International Diversification	921	(1)
Misleading Representation of Diversification Benefits	922	(3)
Realistic Benefits from international Diversification	925	(2)
Are Benefits from international Diversification Preserved in Bear Markets?	927	(1)
25.4 International Investing and Performance Attribution	927	(5)
Constructing a Benchmark Portfolio of Foreign Assets	928	(1)
Performance Attribution	929	(3)
Summary	932	(1)
Key Terms	932	(1)
Websites	933	(1)
Problems	933	(4)
Standard and Poor's	937	(1)
E-Investments: International Diversification	937	(1)
Solutions to Concept Checks	937	(2)
CHAPTER 26 THE PROCESS OF PORTFOLIO MANAGEMENT	939	(42)
26.1 Making Investment Decisions	940	(3)
Objectives	940	(2)
Individual Investors	942	(1)
Personal Trusts	942	(1)
Mutual Funds	942	(1)
Pension Funds	942	(1)
Endowment Funds	942	(1)
Life Insurance Companies	942	(1)
Non-Life Insurance Companies	943	(1)
Banks	943	(1)
26.2 Constraints	943	(3)
Liquidity	944	(1)
Investment Horizon	944	(1)
Regulations	944	(1)
Tax Considerations	944	(1)
Unique Needs	944	(2)
26.3 Asset Allocation	946	(2)
Policy Statements	947	(1)
Taxes and Asset Allocation	947	(1)
26.4 Managing Portfolios of Individual Investors	948	(7)
Human Capital and Insurance	948	(1)
Investment in Residence	949	(1)
Saving for Retirement and the Assumption of Risk	949	(1)
Retirement Planning Models	950	(1)
Manage Your Own Portfolio or Rely on Others?	950	(2)
Tax Sheltering	952	(3)
The Tax-Deferral Option	952	(1)
Tax-Deferred Retirement Plans	953	(1)
Deferred Annuities	953	(1)
Variable and Universal Life Insurance	954	(1)
26.5 Pension Funds	955	(5)
Defined Contribution Plans	955	(1)
Defined Benefit Plans	956	(1)
Alternative Perspectives on Defined Benefit Pension Obligations	956	(1)
Pension Investment Strategies	957	(27)
Investing in Equities	958	(1)
Wrong Reasons to Invest in Equities	959	(1)
26.6 Future Trends in Portfolio Management	960	(1)
Summary	961	(1)
Key Terms	962	(1)
Websites	962	(1)
Problems	963	(10)
E-Investments: Personal Diversification	973	(1)
Solutions to Concept Checks	973	(1)
Appendix: A Spreadsheet Model for Long-Term Investing	974	(7)
CHAPTER 27 THE THEORY OF ACTIVE PORTFOLIO MANAGEMENT	981	(24)
27.1 The Lure of Active Management	982	(1)
27.2 Objectives of Active Portfolios	983	(1)
27.3 Market Timing	984	(4)
Valuing Market Timing as an Option	986	(1)
The Value of Imperfect Forecasting	987	(1)
27.4 Security Selection: The Treynor-Black Model	988	(7)
Overview of the Treynor-Black Model	988	(1)
Portfolio Construction	989	(6)
27.5 Multifactor Models and Active Portfolio Management	995	(1)
27.6 Imperfect Forecasts of Alpha Values and the Use of the Treynor-Black Model in Industry	996	(2)
Summary	998	(1)
Key Terms	999	(1)
Problems	999	(3)
Solutions to Concept Checks	1002	(3)
APPENDIX A Quantitative Review	1005	(38)
APPENDIX B References to CFA Questions	1043	(4)
APPENDIX C Glossary	1047	(14)
NAME INDEX	1061	(4)
SUBJECT INDEX	1065