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JACK CLARK FRANCIS is Professor of Economics and Finance at Bernard M. Baruch College in New York City. His research focuses on investments, banking, and monetary economics, and he has had dozens of articles published in many refereed academic, business, and government journals. Dr. Francis was an assistant professor of finance at the University of Pennsylvania's Wharton School of Finance for five years and was a Federal Reserve economist for two years. He received his bachelor's and MBA from Indiana University and earned his PhD in finance from the University of Washington in Seattle.
Dongcheol Kim is a Professor of Finance at Korea University in Seoul. He served as president of the Korea Securities Association and editor-in-chief of the Asia-Pacific Journal of Financial Studies. Previously, he was a finance professor at Rutgers University. Kim has published articles in Financial Management, the Accounting Review, Journal of Financial and Quantitative Analysis, Journal of Economic Research, Journal of Finance, and Journal of the Futures Market.
Preface
Chapter 1 Introduction
1.1 The Portfolio Management Process
1.2 The Security Analyst's Job
1.3 Portfolio Analysis
1.4 Portfolio Selection
1.5 Mathematics Segregated to Appendices
1.6 Topics To Be Discussed
Appendix Various Rates of Return
PART One: PROBABILITY FOUNDATIONS
Chapter 2 Assessing Risk
2.1 Mathematical Expectation
2.2 What is Risk?
2.3 Expected Return
2.4 Risk of a Security
2.5 Covariance of Returns
2.6 Correlation of Returns
2.7 Using Historical Returns
2.8 Data Input Requirements
2.9 Portfolio Weights
2.10 A Portfolio’s Expected Return
2.11 Portfolio Risk
2.12 Summary of Conventions and Formulas
Chapter 3 Risk and Diversification: An Overview
3.1 Reconsidering Risk
3.2 Utility Theory
3.3 Risk-Return Space
3.4 Diversification
3.5 Conclusions
PART Two: UTILITY FOUNDATIONS
Chapter 4 Single-Period Utility Analysis
4.1 Basic Utility Axioms
4.2 The Utility of Wealth Function
4.3 Utility of Wealth and Returns
4.4 Expected Utility of Returns
4.5 Risk Attitudes
4.6 Absolute Risk Aversion
4.7 Relative Risk Aversion
4.8 Measuring Risk Aversion
4.9 Portfolio Analysis
4.10 Indifference Curves
4.11 Summary and Conclusions
Appendix
PART Three: MEAN-VARIANCE PORTFOLIO ANALYSIS
Chapter 5 Graphical Portfolio Analysis
5.1 Delineating Efficient Portfolios
5.2 Portfolio Analysis Inputs
5.3 Two-Asset Isomean Lines
5.4 Two-Asset Isovariance Ellipses
5.5 Three-Asset Portfolio Analysis
5.6 Legitimate Portfolios
5.7 "Unusual" Graphical Solutions Don’t Exist
5.8 Representing Constraints Graphically
5.9 The "Interior Decorator Fallacy"
5.10 Summary
Appendix
Chapter 6 Mathematical Portfolio Analysis
6.1 Risk and Return for Two-Asset Portfolios
6.2 The Opportunity Set
6.3 Markowitz Diversification
6.4 Efficient Frontier Without the Risk-free Asset
6.5 Introducing A Risk-free Asset
6.6 Summary and Conclusions
Appendix Equations for a Relationship Between and
Chapter 7 Advanced Portfolio Aanalysis Topics
7.1 Efficient Portfolios Without A Risk-Free Asset
7.2 Efficient Portfolios With A Risk-free Asset
7.3 Identifying the Tangency Portfolio
7.4 Summary and Conclusions
Appendix Mathematical Derivation of the Efficient Frontier
Chapter 8 Index Models and Return Generating Process
8.1 Single-Index Models
8.2 Efficient Frontier and the Single Index Model
8.3 Two-Index Models
8.4 Multi-Index Models
8.5 Concluding Remarks
Appendix
PART Four: NON-MEAN-VARIANCE PORTFOLIOS
Chapter 9 Non-Normal Distributions of Returns
9.1 Stable Paretian Distributions
9.2 The Student-t Distribution
9.3 Mixtures of Normal Distributions
9.4 Poisson Jump-Diffusion Process
9.5 The Log-Normal Distribution
9.6 Conclusions
Chapter 10 Non-Mean-Variance Investment Decisions
10.1 Geometric Mean Return Criterion
10.2 The Safety First Criterion
10.3 Semivariance Analysis
10.4 Stochastic Dominance Criterion
10.5 Mean-Variance-Skewness Criterion
10.6 Summary and Concluding Remarks
Appendix
Chapter 11 Risk Management: Value at Risk
11.1 VaR of a Single Asset
11.2 Portfolio VaR
11.3 Decomposition of A Porfolio’s VaR
11.4 Other VaR’s
11.5 Methods of Measuring VaR
11.6 Estimation of Volatilities
11.7 Accuracy of VaR Models
11.8 Summary and Conclusions
Appendix Delta-Gamma Method
PART Five: ASSET PRICING MODELS
Chapter 12 The Capital Asset Pricing Model (CAPM)
12.1 Underlying Assumptions
12.2 The Capital Market Line
12.3 The Capital Asset Pricing Model
12.4 Over- and Under-Priced Securities
12.5 The Market Model and the CAPM
12.6 Summary and Concluding Remarks
Appendix Derivations of The CAPM
Chapter 13 Extensions of the Standard CAPM
13.1 Risk-Free Borrowing or Lending
13.2 Homogeneous Expectations
13.3 Perfect Markets
13.4 Nonmarketable Assets
13.5 Summary and Conclusions
Appendix
Chapter 14 Empirical Tests of CAPM
14.1 Time-Series Tests of the CAPM
14.2 Cross-Sectional Tests of the CAPM
14.3 Empirical Misspecifications in Cross-Sectional Regression Tests
14.4 Multivariate Tests
14.5 Is the CAPM Testable?
14.6 Summary and Conclusions
Chapter 15 Continuous-Time Asset Pricing Models
15.1 Intertemporal CAPM
15.2 Consumption-based CAPM
15.3 Concluding Remarks
Appendix
Chapter 16 Arbitrage Pricing Theory (APT)
16.1 Arbitrage Concepts
16.2 Index Arbitrage
16.3 The Asset Pricing Equation
16.4 Asset Pricing On A Security Market Plane
16.5 Contrasting APT with CAPM
16.6 Empirical Evidence
16.7 Comparing APT and CAPM
16.8 Concluding Remarks
PART Six IMPLEMENTATIING THE THEORY
Chapter 17 Portfolio Construction and Selection
17.1 Efficient Markets
17.2 Using Portfolio Theories to Construct and Select Portfolios
17.3 Security Analysis
17.4 Market timing
17.5 Diversification
17.6 Constructing an Active Portfolio
17.7 Portfolio Revision
17.8 Summary and Conclusions
Appendix Proofs for Some Ratios of An Active Portfolio
Chapter 18 Portfolio Performance Evaluation
18.1 Mutual Fund Returns
18.2 Portfolio Performance Analysis During The “Good Old Days”
18.3 Capital Market Theory Assumptions
18.4 Single-Parameter Portfolio Performance Measures
18.5 Market Timing
18.6 Comparing Single-Parameter Portfolio Performance Measures
18.7 The Index of Total Portfolio Risk (ITPR) and the Portfolio Beta
18.8 Measurement Problems
18.9 Do Winners or Losers Repeat?
18.10 Summary About Investment Performance Evaluation
Appendix Sharpe Ratio of An Active Portfolio
Chapter 19 Performance Attribution
19.1 Factor Model Analysis
19.2 Return-Based Style Analysis
19.3 Return Decomposition-Based Analysis
19.4 Concluding Remarks
Appendix Regression Coefficients Estimation with Constraints
Chapter 20 Stock Market Developments
20.1 Recent Stock Exchange Consolidations
20.2 NYSE Diversifies Internationally
20.3 Recent Mergers at Other Stock Exchanges
20.4 Decimalization
20.5 NYSE Trading Orders
20.6 Dealers Make Markets
20.7 High Frequency Trading
20.8 Alternative Trading Systems (ATSs)
20.9 Algorithmic Trading
20.10 Symbiotic Stock Market Developments
20.11 Detrimental Stock Market Developments
20.12 Summary and Conclusions
About the Authors
Index
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