Scientific Investment Analysis

by Murphy, Austin

• ISBN13: 9781567203387
• ISBN10: 1567203388
• Edition: 2nd
• Format: Hardcover
• Copyright: 2000-01-30
• Publisher: Praeger Pub Text

Summary

A state-of-the art treatment offering scientific procedures that require no special scientific expertise, Murphy's unusual new book provides a unified framework for the evaluation of investment assets and strategies--a particularly useful way to conduct security analysis, portfolio management, and trading, and for other general investment applications. Murphy covers practical methods for credit analysis and demonstrates ways to value equities using a pro forma model that integrates forecasting with the detailed use of financial statements and footnotes. Scientific Investment Analysis explains how to evaluate both fixed income securities and equities, as well as options, futures, and investment companies. It illustrates the use of practical dynamic software for valuing complex call, conversion, and other option features embedded in security contracts. The valuation concepts he presents are well grounded in theory and empirical investigation and explained within the context of international portfolio management. The effects of trading, tax, and regulatory environments on market prices and investment strategies are thoroughly discussed. This is an important resource for investment analysts, researchers, advisers, and brokers, an as excellent text for students in advanced investment or portfolio management at upper university levels.

Author Biography

AUSTIN MURPHY is Professor of Finance, Department of Accounting and Finance, Oakland University, Michigan.

Table of Contents

Tables and Exhibits	x
Preface	xiii
PART I: INTRODUCTORY PORTFOLIO ANALYSIS	1	(46)
Introduction: Investment Goals and Opportunities	3	(10)
General Objectives of Investors	3	(7)
The Role of Institutions in the Investment Process	10	(1)
Investment Category Weightings and Returns	10	(1)
Different Investment Vehicles	11	(1)
References	12	(1)
Diversification and Portfolio Theory	13	(19)
Diversification Theory	13	(5)
The Market Model	18	(4)
The Efficient Frontier	22	(1)
The Capital Market Line (CML)	23	(3)
Diversification Rules of Thumb	26	(3)
External Investment Restrictions on Diversification	29	(1)
References	30	(2)
An Applied Theory of Portfolio Selection	32	(15)
Naive Portfolio Selection	32	(1)
The Security Market Line (SML)	33	(2)
The Capital Asset Pricing Model (CAPM)	35	(1)
Applying the CAPM to the Real World	36	(5)
Using the CAPM to Determine Optimal Leverage	41	(4)
References	45	(2)
PART II: FUNDAMENTAL ANALYSIS	47	(180)
Foundations of Investment Valuation	48	(32)
General Discounted Cash-Flow Model	48	(4)
Simple Examples of Present Value Analysis	52	(10)
Formula Applications for Annuity Cash Flows	62	(1)
Estimating the Value of Foreign Currency Cash Flows	63	(2)
References	65	(15)
Valuing a Spot Asset as an Option	66	(1)
Relationships Between Derivative and Spot Values	66	(9)
Valuing Foreign Currency Cash Flows	75	(5)
Fixed-Income Security Analysis: Introduction	80	(45)
Analysis of Default-Free Fixed-Income Securities	80	(28)
Contractual Risks	108	(3)
Risk of Default	111	(6)
Estimating Value with Contractual and Default Risk	117	(1)
Required Yield to Maturity Model	118	(5)
References	123	(2)
A Simplified Formula for Duration	124	(1)
Fundamental Analysis of Fixed-Income Securities	125	(33)
Information Sources	125	(6)
Default Risk Parameter Estimation	131	(13)
Estimating Premium Returns for Systematic Risk	144	(1)
Analysis of Return Premiums for Call Risk	145	(1)
An Example of Fixed-Income Security Analysis	146	(1)
References	146	(12)
Analyzing Motorola Bonds	148	(10)
Analysis of Equity Investments: Introduction	158	(26)
The Dividend Discount Model	158	(3)
The Pro Forma Model	161	(2)
The Constant Growth Model	163	(1)
The P/e Ratio Model	164	(11)
P/e Ratio Analysis with the Discounted Cash Flow Model	175	(6)
References	181	(3)
Fundamental Analysis of Equity Investments	184	(19)
Information Sources	184	(1)
Integrating Economic, Industry, and Company Forecasts	185	(1)
Using Different Forecast Inputs in Valuation Models	186	(1)
P/e Ratio Analysis	187	(1)
Dupont Analysis	188	(1)
The Effect of Foreign Operations on Ratios	189	(2)
Fundamental Analysis Example	191	(1)
References	191	(12)
Analyzing Motorola Common Stock	192	(11)
Fundamental Analysis of Real Asset Investments	203	(11)
Analysis of Income-Producing Real Assets	203	(7)
Valuation of Non-Incoming Producing Real Assets	210	(3)
References	213	(1)
Fundamental Analysis of Foreign Assets	214	(13)
General Principles of Foreign Asset Valuation	214	(1)
Effect of Exchanges Rates on Valuation	214	(6)
The Foreign Economic and Political Environment	220	(2)
Other Special Considerations	222	(3)
References	225	(2)
PART III: A FUNDAMENTAL SURVEY OF THE EXISTING INVESTMENT OPPORTUNITY SET	227	(93)
Spot Assets	228	(37)
Money Market Investments	228	(4)
Capital Market Instruments	232	(19)
Implications for Investors	251	(11)
References	262	(3)
Forward and Futures Contracts	265	(16)
Customized Forward Contracts	265	(5)
Futures Contracts	270	(5)
Analysis of Forward and Futures Contracts	275	(5)
References	280	(1)
Options	281	(19)
Introduction	281	(3)
Exchange-Traded Options	284	(5)
Off-Exchange Option Contracts	289	(3)
Options Issued by Companies	292	(6)
References	298	(2)
Investment Companies	300	(20)
Asset-Backed Securities	301	(2)
Investment Companies with Varying Portfolios	303	(14)
References	317	(3)
PART IV: THE EXISTING MARKET ENVIRONMENT	320	(95)
The Trading Environment	321	(45)
General Types of Transaction Requests	321	(5)
Primarry Markets	326	(4)
Secondary Markets	330	(16)
Transaction Costs for Filled Orders	346	(7)
The Mechanics of Paying for Orders	353	(7)
Implications of the Trading Environment for Investors	360	(2)
Effect of the Trading Environment of Valuation	362	(1)
References	363	(3)
The Taxation Environment	366	(12)
General Tax Rules	366	(1)
Exceptions to the General Tax Rules	367	(4)
Foreign Taxation	371	(1)
Net Returns in the Tax Environment	372	(2)
Implications of the Tax Environment for Investors	374	(2)
Effect of the Tax Environment on Investment Value	376	(1)
References	376	(2)
The Regulatory and Ethical Environment	378	(14)
The Purpose of Regulation	378	(1)
Rules on Full Disclosure in the Spot Markets	379	(3)
Derivative Regulation and Disclosure	382	(1)
Rules Against Securities Fraud	382	(3)
Regulation of Managers, Advisors, and Brokers	385	(3)
Ethics for Investment Managers and Advisors	388	(1)
Regulation of Foreign Investments	389	(1)
Implications of the Regulatory Environment	389	(1)
References	390	(2)
Market Efficiency and Investment Performance	392	(23)
Market Efficiency in Interpreting Information	392	(1)
Tests of Market Efficiency and Investment Performance	393	(3)
Empirical Evidence of Market Efficiency	396	(4)
Interpretation of Market Price	400	(1)
Implications for Investors	400	(6)
References	406	(9)
An Example of Analyzing a Portfolio	409	(6)
PART V: SPECIFIC PORTFOLIO STRATEGIES	415	(61)
Arbitrage	416	(11)
Exploiting Differences Between Price and Value	416	(1)
Exploitation of Intermarket Mispricing	417	(4)
Subjective Arbitrage	421	(2)
Arbitrage Caveats	423	(1)
References	424	(3)
Risk-Free Rates for Futures Investments	425	(2)
The Theory and Practice of Technical Analysis	427	(18)
General Theory of Technical Analysis	427	(1)
Trend-Following Systems	428	(1)
Estimating Support and Resistance Levels	429	(5)
Estimating Movements in Required Returns	434	(6)
Empirical Evidence on Technical Analysis	440	(2)
References	442	(3)
Hedging	445	(19)
Spot Hedging	445	(1)
Futures Hedging	446	(4)
Option Hedging	450	(4)
Synthetic Hedging	454	(2)
Hedging Only One Component of Return Variation	456	(2)
An Example of the Returns from a Hedged Position	458	(1)
Motivation for Hedging	458	(3)
The Effect of Hedging on Expected Returns and Risk	461	(1)
The Cost of Hedging	462	(1)
References	462	(2)
A Summary of Portfolio Management Strategies	464	(12)
Review of Basic Portfolio Strategies	464	(1)
Arbitrage Strategies	465	(1)
Hedging Strategies	466	(1)
Trading Strategies	467	(3)
Disciplined Strategies for Periodic Investment	470	(3)
Long-Term Portfolio Strategy	473	(1)
Serving Clients	474	(1)
References	474	(2)
Index	476