Quantitative Methods for Investment Analysis

by Defusco, Richard Armand; McLeavey, Dennis W.; Pinto, Jerald E.; Runkle, David E.

• ISBN13: 9780935015690
• ISBN10: 0935015698
• Format: Hardcover
• Copyright: 2001-11-01
• Publisher: Professional Book Distributors

Table of Contents

Foreword	v
Preface	vii
Acknowledgments	ix
About the Authors	xi
The Time Value of Money	1	(52)
Interest Rates and Discount Rates	1	(2)
The Future Value of a Single Cash Flow	3	(8)
The Frequency of Compounding	7	(2)
Continuous Compounding	9	(1)
Stated and Effective Rates	10	(1)
The Future Value of a Series of Cash Flows	11	(3)
Equal Cash Flows-Ordinary Annuity	12	(1)
Unequal Cash Flows	13	(1)
The Present Value of a Single Cash Flow	14	(3)
Finding the Present Value of a Single Cash Flow	14	(2)
The Frequency of Compounding	16	(1)
The Present Value of a Series of Cash Flows	17	(7)
The Present Value of a Series of Equal Cash Flows	17	(4)
The Present Value of an Infinite Series of Equal Cash Flows-Perpetuity	21	(1)
Present Values Indexed at Times Other Than t = 0	22	(2)
The Present Value of a Series of Unequal Cash Flows	24	(1)
Solving for Rates, Number of Periods, or Size of Annuity Payments	24	(7)
Solving for Interest Rates and Growth Rates	25	(2)
Solving for the Number of Periods	27	(1)
Solving for the Size of Annuity Payments	28	(3)
Almost Even Cash Flows	31	(5)
Review of Present and Future Value Equivalence	32	(1)
The Cash Flow Additivity Principle	33	(1)
Applying Equivalence and Additivity to Almost-Even Cash Flows	34	(2)
Summary	36	(17)
Problems	37	(2)
Solutions	39	(14)
Discounted Cash Flow Applications	53	(48)
Discounted Cash Flow Analysis	54	(6)
The Net Present Value Rule	54	(2)
The Internal Rate of Return Rule	56	(3)
Problems with the Internal Rate of Return Rule	59	(1)
Money Market Yields	60	(5)
Basic Bond Valuation	65	(7)
Zero-Coupon Bonds and the Arbitrage-Free Valuation Approach	65	(4)
Coupon Bonds and the Yield to Maturity Valuation Approach	69	(3)
Basic Equity Valuation	72	(9)
Portfolio Return Measurement	81	(6)
Dollar-Weighted Rate of Return	81	(1)
Time-Weighted Rate of Return	82	(5)
Summary	87	(14)
Problems	90	(3)
Solutions	93	(8)
Statistical Concepts and Market Returns	101	(72)
The Nature of Statistics	102	(2)
What Is Statistics?	102	(1)
Populations and Samples	102	(1)
Measurement Scales	103	(1)
Frequency Distributions	104	(7)
Graphic Presentation	111	(4)
The Histogram	111	(1)
The Frequency Polygon and the Cumulative Frequency Distribution	112	(3)
Measures of Central Tendency	115	(15)
The Population Mean	115	(1)
The Sample Mean	115	(2)
Properties of the Arithmetic Mean	117	(1)
The Median	117	(1)
The Mode	118	(1)
Quartiles, Quintiles, Deciles, and Percentiles	119	(2)
Using Quantiles for Portfolio Formation	121	(2)
The Weighted Mean	123	(2)
The Geometric Mean	125	(5)
Measures of Dispersion and Their Applications	130	(8)
The Range	130	(1)
The Mean Absolute Deviation	131	(1)
Population Variance and Standard Deviation	131	(1)
Sample Variance and Standard Deviation	132	(2)
Chebyshev's Inequality	134	(1)
Relative Dispersion	135	(2)
The Sharpe Measure of Risk-Adjusted Performance	137	(1)
Symmetry and Skewness in Return Distributions	138	(4)
Kurtosis in Return Distributions	142	(2)
Using Geometric and Arithmetic Means	144	(3)
Summary	147	(26)
Problems	148	(6)
Solutions	154	(19)
Probability Concepts	173	(52)
Introduction	174	(1)
Probability, Expected Value, and Variance	175	(20)
Portfolio Expected Return and Variance	195	(9)
Topics in Probability	204	(7)
Bayes' Formula	204	(3)
Principles of Counting	207	(4)
Summary	211	(14)
Problems	214	(4)
Solutions	218	(7)
Common Probability Distributions	225	(54)
Introduction to Common Probability Distributions	226	(1)
Discrete Random Variables	227	(13)
The Discrete Uniform Distribution	228	(2)
The Binomial Distribution	230	(10)
Continuous Random Variables	240	(21)
Continuous Uniform Distribution	240	(3)
The Normal Distribution	243	(8)
Applications of the Normal Distribution	251	(6)
The Lognormal Distribution	257	(4)
Monte Carlo Simulation	261	(5)
Summary	266	(13)
Problems	269	(4)
Solutions	273	(6)
Sampling and Estimation	279	(36)
Introduction	280	(1)
Sampling	280	(6)
Simple Random Sampling	280	(2)
Stratified Random Sampling	282	(1)
Time-Series and Cross-Sectional Data	283	(3)
Distribution of the Sample Mean	286	(3)
The Central Limit Theorem	286	(3)
Point and Interval Estimates of the Population Mean	289	(9)
Point Estimators	289	(2)
Confidence Intervals for the Population Mean	291	(7)
More on Sampling	298	(4)
Data-Snooping/Data-Mining Bias	298	(1)
Sample Selection Bias	299	(1)
Look-Ahead Bias	300	(1)
Time-Period Bias	301	(1)
Summary	302	(13)
Problems	305	(3)
Solutions	308	(7)
Hypothesis Testing	315	(46)
Introduction	316	(1)
Hypothesis Testing	317	(9)
Hypothesis Tests Concerning the Mean	326	(15)
Tests Concerning a Single Mean	326	(7)
Tests Concerning Differences between Means	333	(4)
Tests Concerning Mean Differences	337	(4)
Hypothesis Tests Concerning Variance	341	(4)
Tests Concerning a Single Variance	341	(2)
Tests Concerning Differences between Variances	343	(2)
Other Issues In Inference	345	(2)
Summary	347	(14)
Problems	350	(5)
Solutions	355	(6)
Correlation and Regression	361	(66)
Introduction	362	(1)
Correlation Analysis	363	(16)
Scatter Plots	363	(1)
Correlation Analysis	364	(2)
Calculating and Interpreting the Correlation Coefficient	366	(2)
Uses and Limitations of Correlation Analysis	368	(9)
Testing the Significance of the Correlation Coefficient	377	(2)
Linear Regression	379	(24)
Linear Regression with One Independent Variable	379	(3)
The Assumptions of the Linear Regression Model	382	(4)
The Standard Error of Estimate	386	(2)
The Coefficient of Determination	388	(2)
Confidence Intervals and Testing Hypotheses	390	(6)
Analysis of Variance in a Regression with One Independent Variable	396	(3)
Prediction Intervals	399	(2)
Limitations of Regression Analysis	401	(2)
Summary	403	(24)
Problems	405	(12)
Solutions	417	(10)
Multiple Regression and Issues in Regression Analysis	427	(60)
Introduction	428	(1)
Multiple Linear Regression	428	(11)
Assumptions of the Multiple Linear Regression Model	432	(2)
The Standard Error of Estimate in Multiple Linear Regression	434	(2)
Predicting the Dependent Variable in a Multiple Regression Model	436	(1)
Testing Whether All Population Regression Coefficients Are Equal to Zero	437	(2)
Is R2 Related to Statistical Significance?	439	(1)
Using Dummy Variables in Regressions	439	(6)
Heteroskedasticity	445	(5)
Types of Heteroskedasticity	447	(2)
Correcting for Heteroskedasticity	449	(1)
Serial Correlation	450	(7)
The Consequences of Serial Correlation	450	(1)
Testing for Serial Correlation	451	(2)
Correcting for Serial Correlation	453	(4)
Multicollinearity	457	(2)
Heteroskedasticity, Serial Correlation, and Multicollinearity: Summarizing the Issues	459	(1)
Models with Qualitative Dependent Variables	460	(2)
Summary	462	(25)
Problems	465	(12)
Solutions	477	(10)
Time Series Analysis	487	(70)
Introduction to Time Series Analysis	488	(3)
Trends	491	(6)
The Limitations of Trend Models	497	(1)
Fundamental Issues in Time Series	498	(2)
Autoregressive Time-Series Models	500	(12)
Mean Reversion	503	(1)
Multiperiod Forecasts and the Chain Rule of Forecasting	504	(3)
Comparing Forecast Model Performance	507	(2)
Instability of Regression Coefficients	509	(3)
Random Walks and Unit Roots	512	(9)
Random Walks	512	(4)
Unit Roots	516	(5)
Moving-Average Time-Series Models	521	(4)
Smoothing Past Values with an n-Period Moving Average	521	(2)
Moving-Average Time Series Models for Forecasting	523	(2)
Seasonality in Time-Series Models	525	(6)
Autoregressive Moving-Average Models	531	(1)
Autoregressive Conditional Heteroskedasticity	532	(3)
Other Issues In Time Series	535	(1)
Suggested Steps in Time-Series Forecasting	536	(2)
Summary	538	(19)
Problems	540	(10)
Solutions	550	(7)
Portfolio Concepts	557	(79)
Introduction	559	(1)
Mean-Variance Analysis and Diversification	560	(33)
Optimal Portfolios with Three Assets	570	(3)
Determining the Minimum-Variance Frontier for Many Assets	573	(3)
Instability in the Minimum-Variance Frontier	576	(3)
Diversification and Portfolio Size	579	(4)
Risk-Free Assets and the Trade-Off between Risk and Return	583	(6)
The Capital Allocation Line Equation	589	(2)
The Capital Asset Pricing Model	591	(2)
Practical Issues in Mean-Variance Analysis	593	(5)
Estimates Based on Historical Means, variances, and Covariances	594	(1)
The Market Model	594	(3)
Adjusted Beta Market Models	597	(1)
Multifactor Models	598	(21)
The Structure of Factor Models	599	(3)
Arbitrage Pricing Theory and the Factor Model	602	(11)
Multifactor Models in Current Practice	613	(5)
Concluding Remarks	618	(1)
Summary	619	(17)
Problems	627	(3)
Solutions	630	(6)
Appendix A Cumulative Probabilities for a Standard Normal Distribution P(Z ≤ x) = N(x) for x ≤ 0 or P(Z ≤ z) = N(z) for z ≤ 0	636	(2)
Appendix B Table of the Student's t-Distribution (One Tailed Probabilities)	638	(1)
Appendix C Values of X2 (Degrees of Freedom, Level of Significance)	639	(1)
Appendix D Table of the F-Distribution	640	(4)
Appendix E Critical Values for the Durbin-Watson Statistic (α = .05)	644	(1)
References	645	(4)
Glossary	649	(10)
Index	659