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The Professional Risk Managers' International Association (PRMIA) is one of the world's leading risk management associations, with over 40,000 members in 179 countries. A non-profit, PRMIA is dedicated to the development of new techniques and best practices for managing financial and investment risks, and offers the only globally endorsed Professional Risk Manager certification program.
Carol Alexander is Professor of Risk Management and Director of Research at the ICMA Centre, UK and Chair of the Academic Advisory Council of PRMIA.
Elizabeth Sheedy is an Associate Professor at the Macquarie Applied Finance Centre in Sydney, Australia.
About the Contributors | p. ix |
Introduction: Interest Rates and Time Value | p. 1 |
Compounding Methods | p. 1 |
Interest Rates: Nominal, Periodic, Continuous, or Effective | p. 4 |
Risk and Risk Aversion | p. 7 |
Introduction | p. 7 |
Mathematical Expectations: Prices or Utilities? | p. 9 |
The Axiom of Independence of Choice | p. 10 |
Maximizing Expected Utility | p. 12 |
Encoding a Utility Function | p. 16 |
The Mean-Variance Criterion | p. 23 |
Risk-Adjusted Performance Measures | p. 26 |
Conclusions | p. 39 |
References | p. 41 |
Terminology | p. 42 |
Utility Functions | p. 44 |
Notes | p. 50 |
Portfolio Mathematics | p. 55 |
Means and Variances of Past Returns | p. 55 |
Mean and Variance of Future Returns | p. 65 |
Mean-Variance Tradeoffs | p. 72 |
Multiple Assets | p. 80 |
A Hedging Example | p. 84 |
Serial Correlation | p. 93 |
Normally Distributed Returns | p. 95 |
Reference | p. 102 |
Note | p. 102 |
Capital Allocation | p. 103 |
An Overview | p. 103 |
Mean-Variance Criterion | p. 109 |
Efficient Frontier: Two Risky Assets | p. 110 |
Asset Allocation | p. 114 |
Combining the Risk-Free Asset with Risky Assets | p. 116 |
The Market Portfolio and the Capital Market Line | p. 120 |
The Market Price of Risk and the Sharpe Ratio | p. 122 |
Separation Principle | p. 122 |
Conclusions | p. 123 |
Mathematics of the Mean-Variance Model | p. 125 |
The CAPM and Multifactor Models | p. 129 |
Overview | p. 130 |
Capital Asset Pricing Model | p. 131 |
Performance Measures | p. 136 |
The Single-Index Model | p. 139 |
Multifactor Models and the APT | p. 141 |
Conclusions | p. 143 |
References | p. 144 |
Notes | p. 144 |
Basics of Capital Structure | p. 147 |
Introduction | p. 147 |
Maximizing Shareholder Value, Incentives, and Agency Costs | p. 151 |
Characteristics of Debt and Equity | p. 155 |
Choice of Capital Structure | p. 157 |
Making the Capital Structure Decision | p. 169 |
Conclusions | p. 173 |
References | p. 174 |
Notes | p. 174 |
The Term Structure of Interest Rates | p. 177 |
Introduction | p. 177 |
Introduction to the Term Structure of Interest Rates | p. 177 |
Theories of the Term Structure | p. 182 |
Term Structure Models | p. 185 |
Conclusions | p. 203 |
References | p. 204 |
Notes | p. 204 |
Valuing Forward Contracts | p. 207 |
The Difference between Pricing and Valuation for Forward Contracts | p. 207 |
Principles of Pricing and Valuation for Forward Contracts on Assets | p. 209 |
Principles of Pricing and Valuation for Forward Contracts on Interest Rates | p. 219 |
The Relationship between Forward and Futures Prices | p. 225 |
References | p. 226 |
Notes | p. 226 |
Basic Principles of Option Pricing | p. 229 |
Factors Affecting Option Prices | p. 229 |
Put-Call Parity | p. 230 |
One-Step Binomial Model and The Riskless Portfolio | p. 233 |
Delta Neutrality and Simple Delta Hedging | p. 235 |
Risk-Neutral Valuation | p. 241 |
Real versus Risk-Neutral | p. 242 |
The Black-Scholes-Merton Pricing Formula | p. 243 |
The Greeks | p. 248 |
Implied Volatility | p. 250 |
Intrinsic versus Time Value | p. 252 |
References | p. 252 |
Notes | p. 252 |
Index | p. 255 |
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