)
Security Analysis, Portfolio Management, and Financial Derivatives
2nd Edition
Cheng-Few Lee
Rutgers University, New Brunswick
Joseph E. Finnerty
University of Illinois, Urbana
Alice C. Lee
State Street Corp., Boston
John Lee
Center for PBBEF Research
Donald H. Wort
California State University, Hayward
Contents
Chapter 1
Introduction
1.1 OBJECTIVE OF SECURITY ANALYSIS
1.2 OBJECTIVE OF PORTFOLIO MANAGEMENT
1.3 BASIC APPROACHES TO SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
1.4 SOURCE OF INFORMATION
1.5 STRUCTURE OF THE BOOK
1.6 SUMMARY
QUESTIONS AND PROBLEMS
BIBLIOGRAPHY
Part I. Information and Security Valuation
Chapter 2
Accounting Information and Regression Analysis
2.1 Introduction
2.2 Financial statementS: A brief review
2.2.1 Balance Sheet
2.2.2 Statement of Earnings
2.2.3 Statement of Equity
2.2.4 Statement of Cash Flow
2.2.5 Interrelationship among Four Financial Statements
2.2.6 Annual versus Quarterly Financial Data
2.3 Critique of accounting information
2.3.1 Criticism
2.3.2 Methods for Improvement
2.3.2.1 Use of Alternative Information
2.3.2.2 Statistical Adjustments
2.3.2.3 Application of Finance and Economic Theories
2.4 Static ratio analysis and its extension
2.4.1 Static Determination of Financial Ratios
2.4.1.1 Liquidity Ratios
2.4.1.2 Leverage Ratios
2.4.1.3 Activity Ratios
2.4.1.4 Profitability Ratios
2.4.1.5 Estimation of the Target of a Ratio
2.4.2 Dynamic Analysis of Financial Ratios
2.4.2.1 Single-Equation Dynamic Adjustment Process
2.4.2.2 Simultaneous Determination of Financial Ratios
2.4.3 Statistical Distribution of Financial Ratios
2.5 Cost–volume-profit analysis and its applications
2.5.1 Deterministic Analysis
2.5.2 Stochastic Analysis
2.6 Accounting income vERSUs economic income
2.7 Summary
QUESTIONS AND PROBLEMS
Appendix 2A: Simple regression and multiple regressions
Appendix 2B: Instrumental variables and two-stage least squares
BIBLIOGRAPHY
PowerPoint file Chapter 2 Appendix
Chapter 3
Common Stock: Return, Growth, and Risk
3.1 HOLDING-PERIOD RETURN
3.2 HOLDING-PERIOD YIELD
3.2.1 Arithmetic Mean
3.2.2 Geometric Mean
3.2.3 Weighted Unbiased Mean
3.3 COMMON-STOCK VALUATION APPROACHES
3.4 GROWTH-RATE ESTIMATION AND ITS APPLICATION
3.4.1 Compound-Sum Method
3.4.2 Regression Method
3.4.3 One-Period Growth Model
3.4.4 Two-Period Growth Model
3.4.5 Three-Period Growth Model
3.5 RISK
3.5.1 Definitions of Risk
3.5.2 Sources of Risk
3.5.2.1 Firm-Specific Factors
3.5.2.2 Market and Economic Factors
3.6 COVARIANCE AND CORRELATION
3.7 SYSTEMATIC, UNSYSTEMATIC RISK, AND THE MARKET MODEL
3.8 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 3A: LOGARITHMS AND THEIR PROPERTIES
APPENDIX 3B: ln X2, ln X3, AND ln X4 AND THEIR ESTIMATES
BIBLIOGRAPHY
PowerPoint file Chapter 3 Appendix
Chapter 4
Introduction to Valuation Theories
4.1 DISCOUNTED CASH-FLOW VALUATION THEORY
4.2 BOND VALUATION
4.2.1 Perpetuity
4.2.2 Term Bonds
4.3 COMMON-STOCK VALUATION
4.4 M&M VALUATION THEORY
4.4.1 Review and Extension of M&M Proposition I
4.4.2 Miller’s Proposition on Debt and Taxes
4.5 THE TAX REFORM ACT OF 1986 AND ITS IMPACT ON FIRM VALUE
4.6 CORPORATE RESPONSE TO THE TAX REFORM ACT OF 1986
4.7 CAPITAL ASSET PRICING MODEL
4.8 OPTION VALUATION
4.9 SUMMARY
QUESTION AND PROBLEMS
BIBLIOGRAPHY
Chapter 5
Bond Valuation and Analysis
5.1 BOND FUNDAMENTALS
5.1.1 Type of Issuer
5.1.1.1 US Treasury
5.1.1.2 Federal Agencies
5.1.1.3 Municipalities
5.1.1.4 Corporations
5.1.2 Bond Provisions
5.1.2.1 Maturity Classes
5.1.2.2 Mortgage Bond
5.1.2.3 Debentures
5.1.2.4 Coupons
5.1.2.5 Maturity
5.1.2.6 Callability
5.1.2.7 Sinking Funds
5.2 Bond Valuation, Bond index, and Bond beta
5.2.1 Bond Valuation
5.2.2 Bond Indices
5.2.3 Bond Beta
5.3 BOND-RATING PROCEDURES
5.4 TERM STRUCTURE OF INTEREST
5.4.1 Theory
5.4.2 Estimation
5.5 CONVERTIBLE BONDS AND THEIR VALUATION
5.6 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 5A: WORKSHEETS FOR YIELD CURVES
BIBLIOGRAPHY
PowerPoint file Chapter 5 Appendix
Chapter 6
The Uses and Calculation of Market Indexes
6.1 ALTERNATIVE METHODS FOR COMPILATION OF STOCK AND PRICE INDEXES
6.1.1 Price-Weighted and Quantity-Weighted Indexes
6.1.2 Value-Weighted Indexes
6.2 ALTERNATIVE MARKET INDEXES
6.2.1 Dow Jones Industrial Average
6.2.2 Standard & Poor’s Composite 500 Index
6.2.3 New York Stock Exchange Composite Index
6.2.4 Wilshire 5000 Equity Index
6.2.5 Standard & Poor’s Composite 100 Index
6.3 THE USER AND USES OF MARKET INDEXES
6.4 HISTORICAL BEHAVIOR OF MARKET INDEXES AND THE IMPLICATIONS OF THEIR USE FOR FORECASTING
6.4.1 Historical Behavior
6.4.2 Implications
6.5 MARKET-INDEX PROXY ERRORS AND THEIR IMPACT ON BETA ESTIMATES AND EFFICIENT-MARKET-HYPOTHESIS TESTS
6.6 INDEX-PROXY ERROR, PERFORMANCE MEASURE, AND THE EMH TEST
6.7 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 6A: MONTHLY RETURNS FOR THE WILSHIRE 5000 EQUITY INDEXES
BIBLIOGRAPHY
PowerPoint file Chapter 6 Appendix
Project I Financial Statement Analysis and Security Valuation
Part II. Portfolio Theory and Asset Pricing
Chapter 7
Sources of Risks and Their Determination
7.1 RISK CLASSIFICATION AND MEASUREMENT
7.1.1 Call Risk
7.1.2 Convertible Risk
7.1.3 Default Risk
7.1.4 Interest-Rate Risk
7.1.5 Management Risk
7.1.6 Marketability (Liquidity) Risk
7.1.7 Political Risk
7.1.8 Purchasing-Power Risk
7.1.9 Systematic and Unsystematic Risk
7.2 PORTFOLIO ANALYSIS AND APPLICATION
7.2.1 Expected Return on a Portfolio
7.2.2 Variance and Standard Deviation of a Portfolio
7.2.3 The Two-Asset Case
7.2.4 Asset Allocation among Risk Free Asset, Corporate Bond, and Equity
7.3 THE EFFICIENT PORTFOLIO AND RISK DIVERSIFICATION
7.3.1 The Efficient Portfolio
7.3.2 Corporate Application of Diversification
7.3.3 The Dominance Principle
7.3.4 Three Performance Measures
7.3.5 Interrelationship among Three Performance Measure
7.4 DETERMINATION OF COMMERCIAL LENDING RATE
7.5 THE MARKET RATE OF RETURN AND MARKET RISK PREMIUM
7.6 SUMMARY
QUESTIONS AND PROBLEMS
BIBLIOGRAPHY
Chapter 8
Risk-Aversion, Capital Asset Allocation, and Markowitz Portfolio-Selection Model
8.1 UTILITY THEORY, UTILITY FUNCTIONS, AND INDIFFERENCE CURVES
8.1.1 Utility Theory
8.1.2 Utility Functions
8.1.2.1 Linear Utility Function and Risk
8.1.2.2 Concave Utility Function and Risk
8.1.3 Risk Aversion and Asset Allocation
8.1.4Indifference Curves
8.2 Efficient Portfolios
8.2.1 Portfolio Combinations
8.2.2 Short Selling
8.3 TECHNIQUES FOR CALCULATING THE EFFICIENT FRONTIER WITH SHORT SELLING
8.3.1 The Normal Distribution
8.3.2 The Log-Normal Distribution
8.3.3 Mathematical Method to Calculate Efficient Frontier
8.3.4 Portfolio Determination with Specific Adjustment for Short Selling
8.3.5 Portfolio Determination without Short Selling
8.4 SUMMARY
QUESTIONS AND PROBLEMS
Appendix 8A: GRAPHICAL ANALYSIS IN MARKOWITZ PORTFOLIO-SELECTION MODEL: THREE-SECURITY EMPIRICAL SOLUTION
BIBLIOGRAPHY
PowerPoint file Chapter 8 Appendix
Chapter 9
Capital Asset Pricing Model and Beta Forecasting
9.1 A GRAPHICAL APPROACH TO THE DERIVATION OF THE CAPM
9.1.1 The Lending, Borrowing, and Market Portfolios
9.1.2 The Capital Market Line
9.1.3 The Security Market Line — The Capital Asset Pricing Model
9.2 MATHEMATICAL APPROACH TO THE DERIVATION OF THE CAPM
9.3 THE MARKET MODEL AND RISK DECOMPOSITION
9.3.1 The Market Model
9.3.2 Risk Decomposition
9.3.3 Why Beta is Important for Security Analysis
9.3.4 Determination of Systematic Risk
9.4 GROWTH RATES, ACCOUNTING BETAS, AND VARIANCE IN EBIT
9.4.1 Sustainable Growth Rates
9.4.2 Accounting Beta
9.4.3 Variance in EBIT
9.4.4 Capital–Labor Ratio
9.4.5 Fixed Costs and Variable Costs
9.4.6 Beta Forecasting
9.4.7 Market-Based versus Accounting-Based Beta Forecasting
9.5 SOME APPLICATIONS AND IMPLICATIONS OF THE CAPM
9.6 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 9A: EMPIRICAL EVIDENCE FOR THE RISK-RETURN RELATIONSHIP
9A.1 Anomalies in the Semi-Strong Efficient-Market Hypothesis
BIBLIOGRAPHY
PowerPoint file Chapter 9 Appendix
Chapter 10
Index Models for Portfolio Selection
10.1 THE SINGLE-INDEX MODEL
10.1.1Deriving the Single-Index Model
10.1.1.1 Expected Return of a Portfolio
10.1.1.2 Variance of a Portfolio
10.1.2 Portfolio Analysis and the Single-Index Model
10.1.3 The Market Model and Beta
10.2 MULTIPLE INDEXES AND THE MIM
10.3 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 10A: A LINEAR-PROGRAMMING APPROACH TO PORTFOLIO-ANALYSIS MODELS
APPENDIX 10B: EXPECTED RETURN, VARIANCE, AND COVARIANCE FOR A MIM
APPENDIX 10C: USING MICROSOFT EXCEL TO CALCULATE OPTIMAL WEIGHTS OF A PORTFOLIO
BIBLIOGRAPHY
PowerPoint file Chapter 10 Appendix
Chapter 11
Performance-Measure Approaches for Selecting Optimum Portfolios
11.1 SHARPE PERFORMANCE-MEASURE APPROACH WITH SHORT SALES ALLOWED
11.2 TREYNOR-MEASURE APPROACH WITH SHORT SALES ALLOWED
11.3 TREYNOR-MEASURE APPROACH WITH SHORT SALES NOT ALLOWED
11.4 IMPACT OF SHORT SALES ON OPTIMAL-WEIGHT DETERMINATION
11.5 ECONOMIC RATIONALE OF THE TREYNOR PERFORMANCE-MEASURE METHOD
11.6 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 11A: DERIVATION OF EQUATION (11.6a)
APPENDIX 11B: DERIVATION OF EQUATION (11.10)
APPENDIX 11C: DERIVATION OF EQUATION (11.15)
APPENDIX 11D: QUARDRATIC PROGRAMMING AND KUHN–TUCKER CONDITIONS
APPENDIX 11E: PORTFOLIO OPTIMIZATION WITH SHORT-SELLING CONSTRAINS
BIBLIOGRAPHY
PowerPoint file Chapter 11 Appendix
Chapter 12
The Efficient-Market Hypothesis and Security Valuation
12.1 MARKET VALUE VERSUS BOOK VALUE
12.1.1 Assets
12.1.2 Liabilities and Owner’s Equity
12.1.3 Ratios and Market Information
12.1.4 Market-to-Book Ratio
12.2 MARKET EFFICIENCY IN A MARKET-MODEL AND CAPM CONTEXT
12.2.1Market Model
12.2.2Sharpe-Lintner CAPM Model
12.3 TESTS FOR MARKET EFFICIENCY
12.3.1 Weak Form Efficiency
12.3.2 Semi-Strong Form Efficiency
12.3.3 Strong Form Efficiency
12.4 OTHER METHODS OF TESTING THE EMH
12.4.1 Random walk with Reflecting Barriers
12.4.2 Variance-Bound Approach Test
12.4.3 Hillmer and Yu’s Relative EMH Test
12.5 RANDOM WALK HYPOTHESIS VERSUS EMH TEST
12.6 MARKET ANOMALIES
12.6.1 The P/E Effect
12.6.2 The Size Effect
12.6.3 The January Effect
12.7 SUMMARY
QUESTIONS AND PROBLEMS
BIBLIOGRAPHY
Chapter 13
Arbitrage Pricing Theory and Intertemporal Capital Asset Pricing Model
13.1 MULTI-INDEX MODELS
13.2 MODEL SPECIFICATION OF APT
13.2.1 Ross’s Arbitrage Model Specification
13.2.2 Empirical Test Methodology
13.3 APT: EMPIRICAL RESULTS AND IMPLICATIONS
13.4 IDENTIFYING THE MODEL FACTORS
13.5 APT VERSUS MPT AND THE CAPM
13.6 INTERTEMPORAL CAPM
13.7 APPLICATIONS OF APT
13.8 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 13A: ALTERNATIVE SPECIFICATIONS OF APT
APPENDIX 13B: LEE AND WEI’S EMPIRICAL RESULTS
BIBLIOGRAPHY
PowerPoint file Chapter 13 Appendix
Project II Market Model, CAPM, and Portfolio Analysis
Part III. Futures and Option
Chapter 14
Futures Valuation and Hedging
14.1 FUTURES VERSUS FORWARD MARKETS
14.2 FUTURES MARKETS: OVERVIEW
14.3 COMPONENTS AND MECHANICS OF FUTURES MARKETS
14.3.1 The Exchanges
14.3.2 The Clearinghouse
14.3.3 Margin
14.3.4 Order Execution
14.3.5 A Sample T-bill Futures Transaction
14.4 THE VALUATION OF FUTURES CONTRACTS
14.4.1 The Arbitrage Argument
14.4.2 Interest Costs
14.4.3 Carrying Costs
14.4.4 Supply and Demand Effects
14.4.5 The Effect of Hedging Demand
14.5 HEDGING CONCEPTS AND STRATEGIES
14.5.1 Hedging Risks and Costs
14.5.2 The Classic Hedge Strategy
14.5.3 The Working Hedge Strategy
14.5.4 The Johnson Minimum-Variance Hedge Strategy
14.5.5 The Howard-D’Antonio Optimal Risk-Return Hedge Strategy
14.5.5.1. Other Hedge Ratios
14.6 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 14A: BASIC FUTURES TERMINOLOGY
BIBLIOGRAPHY
Chapter 15
Commodity Futures, Financial Futures, and Stock-Index Futures
15.1 COMMODITY FUTURES
15.2 FUTURES QUOTATIONS
15.3 FINANCIAL FUTURES
15.3.1 Currency Futures
15.3.1.1Evolution
15.3.1.2 Advantages
15.3.1.3 Pricing Currency Futures
15.3.2 The Traditional Theory of International Parity
15.3.2.1 Interest-Rate Parity
15.3.2.2 Purchasing-Power Parity
15.3.2.3 Fisherian Relation
15.3.2.4 Forward Parity
15.3.3 Interest-Rate Futures
15.3.4 US Treasury Debt Futures
15.3.4.1 Characteristics of T-Bill Futures
15.3.4.2 Pricing T-Bill Futures Contracts
15.3.4.3 Characteristics of T-Note and T-Bond Futures
15.3.5 The Eurodollar Futures Market
15.3.5.1 Evolution
15.3.5.2 Eurodollar Futures
15.4 STOCK-INDEX FUTURES
15.4.1 Pricing Stock-Index Futures Contracts
15.4.2 Stock-Index Futures: Does the Tail Wag the Dog?
15.5 SUMMARY
QUESTIONS AND PROBLEMS
BIBLIOGRAPHY
Chapter 16
Options and Option Strategies
16.1 THE OPTION MARKET AND RELATED DEFINITIONS
16.1.1 What is an Option?
16.1.2 Types of Options and Their Characteristics
16.1.3 Relationships between the Option Price and the Underlying Asset Price
16.1.5 Types of Underlying Asset
16.1.6 Institutional Characteristics
16.2 PUT–CALL PARITY
16.2.1 European Options
16.2.3 Futures Options
16.3.7 Long Vertical (Bull) Spread
16.3.9 Calendar (Time) Spreads
16.4.3 Long Vertical (Bull) Spread
16.4.5 Protective Put
16.4.6 Covered Call
16.4.7 Collar
QUESTIONS AND PROBLEMS
BIBLIOGRAPHY
Chapter 17
Option Pricing Theory and Firm Valuation
17.1 Basic Concepts of Options
17.1.1 Option Price Information
17.2 Factors Affecting Option Value
17.2.1 Determining the Value of a Call Option before the Expiration Date
17.3 DETERMINING THE VALUE OF OPTIONS
17.3.1 Expected Value Estimation
17.3.2 The Black–Scholes Option Pricing Model
17.3.3 Taxation of Options
17.3.4 American Options
17.4 Option Pricing Theory and capital structure
17.4.1 Proportion of Debt in Capital Structure
17.4.2 Riskiness of Business Operations
17.4.3 Option Pricing Approach to Determine the Optimal Capital Structure
17.5 Warrants
17.6 Summary
QUESTIONS AND PROBLEMS
Appendix 17A: Applications of the Binomial Distribution to Evaluate Call Options
BIBLIOGRAPHY
PowerPoint file Chapter 17 Appendix
Chapter 18
Decision Tree and Microsoft Excel Approach for Option Pricing Model
18.1 CALL AND PUT OPTIONS
18.2 ONE-PERIOD OPTION PRICING MODEL
18.3 TWO-PERIOD OPTION PRICING MODEL
18.4 USING MICROSOFT EXCEL TO CREATE THE BINOMIAL OPTION TREES
18.5 BLACK–SCHOLES OPTION PRICING MODEL
18.6 RELATIONSHIP BETWEEN THE BINOMIAL OPTION PRICING MODEL AND THE BLACK–SCHOLES OPTION PRICING MODEL
18.7 DECISION TREE BLACK–SCHOLES CALCULATION
18.8 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 18A: EXCEL VBA CODE — BINOMIAL OPTION PRICING MODEL
BIBLIOGRAPHY
PowerPoint file Chapter 18 Appendix
Chapter 19
Normal, Log-Normal Distribution, and Option Pricing Model
19.1 The Normal Distribution
19.2 The Log-normal Distribution
19.3 The Log-normal Distribution and Its Relationship to the Normal Distribution
19.4 Multivariate Normal and Log-normal Distributions
19.5 The normal Distribution as An Application to the Binomial and Poisson Distributions
19.6 Applications of the Log-normal Distribution in Option Pricing
19.7 The bivariate normal density function
19.8 american call options
19.8.1 Price American Call Options by the Bivariate Normal Distribution
19.8.2 Pricing an American Call Option: An Example
19.9 PRICING BOUNDS FOR OPTIONS
19.9.1 Options Written on Nondividend-Paying Stocks
19.9.2 Option Written on Dividend-Paying Stocks
19.10 SUMMARY
Questions and Problems
applendix 19a: Microsoft excel program for calculating cumulative bivariate normal density function
APPENDIX 19B. MICROSOFT EXCEL PROGRAM FOR CALCULATING THE AMERICAN CALL OPTIONS
BIBLIOGRAPHY
PowerPoint file Chapter 19 Appendix
Chapter 20
Comparative Static Analysis of Option Pricing Models
20.1
Delta
()
20.1.1 Derivation of Delta for Different Kinds of Stock Options
20.1.2 Application of Delta
()
20.2
Theta
(
)
20.2.1 Derivation of Theta for Different Kinds of Stock Options
20.2.2 Application of Theta
()
20.3
Gamma
(
)
20.3.1 Derivation of Gamma for Different Kinds of Stock Options
20.3.2 Application of Gamma
()
20.4
Vega
(
)
20.4.1 Derivation of Vega for Different Kinds of Stock Options
20.4.2 Application of Vega
()
20.5
Rho
(
)
20.5.1 Derivation of Rho for Different Kinds of Stock Options
20.5.2 Application of Rho
()
20.6 Derivation of Sensitivity for Stock Options With Respective to Exercise Price
20.7 Relationship between Delta, Theta, and Gamma
20.8 SUMMARY
questions and problems
BIBLIOGRAPHY
Project III Option Valuation and Strategies
Part IV. Applied Portfolio Management
Chapter 21
Security Analysis and Mutual Fund Performance
21.1 FUNDAMENTAL VERSUS TECHNICAL ANALYSIS
21.1.1 Fundamental Analysis
21.1.2 Technical Analysis
21.1.3 Dow Theory
21.1.4 The Odd-Lot Theory
21.1.5 The Confidence Index
21.1.6 Trading Volume
21.1.7 Moving Average
21.2 ANOMALIES AND THEIR IMPLICATIONS
21.2.1 Basu’s Findings
21.2.2 Reinganum’s Findings
21.2.3 Banz’s Findings
21.2.4 Keim’s Findings
21.2.5 Additional Findings
21.3 SECURITY RATE-OF-RETURN FORECASTING
21.3.1 Regression Approach
21.3.1.1 Fixed-Coefficient Market Model
21.3.1.2 Time-Varying-Coefficient Market Model
21.3.2 Time-Series Approach
21.3.2.1Component Analysis
21.3.2.2 ARIMA Models
21.3.3 Composite Forecasting
21.4 VALUE LINE RANKING
21.4.1 Criteria of Ranking
21.4.2 Performance Evaluation
21.5 MUTUAL FUNDS
21.5.1 Mutual-Fund Classification
21.5.2 Mutual-Fund Manager’s Timing and Selectivity
21.6 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 21A: COMPOSITE FORECASTING METHOD
BIBLIOGRAPHY
PowerPoint file Chapter 21 Appendix
Chapter 22
International Diversification and Asset Pricing
22.1 EXCHANGE-RATE RISK
22.2 THEORETICAL EFFECTS OF INTERNATIONAL DIVERSIFICATION
22.2.1 Segmented versus Integrated World Markets
22.2.2 The CAPM and the APT Applied Internationally
22.2.3 Inflation and Exchange-Rate Risks
22.2.4 Are World Markets Efficient?
22.2.5 Empirical Evidence Supporting International Diversification
22.3 APPLIED INTERNATIONAL DIVERSIFICATION
22.3.1 Direct Foreign Investment
22.3.1.1 Canada
22.3.1.2 West Germany
22.3.1.3 Japan
22.3.1.4 Other Pacific-Basin Countries
22.3.1.5 United Kingdom
22.3.2 Indirect Foreign Investment
22.3.2.1 American Depository Receipts
22.3.2.2 Eurobonds
22.3.2.3 International Mutual Funds
22.3.3 Return, Risk, and Sharpe Performance Measure for International Indexes
22.4 CURRENCY OPTION AND INDEX OPTION
22.4.1 Currency Option
22.4.2 Index Option
22.5 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 22A: OBJECTIVES AND POLICIES OF AN INTERNATIONAL MUTUAL FUND
BIBLIOGRAPHY
PowerPoint file Chapter 22 Appendix
Chapter 23
Bond Portfolios: Management and Strategy
23.1 BOND STRATEGIES
23.1.1 Riding the Yield Curve
23.1.2Maturity-Structure Strategies
23.1.3 Swapping
23.1.3.1 Substitution Swap
23.1.3.2 Intermarket-Spread Swap
23.1.3.3 Interest-Rate Anticipation Swap
23.1.3.4 Pure Yield-Pickup Swap
23.2 Duration
23.2.1 Weighted-Average Term to Maturity
23.2.2 WATM versus Duration Measure
23.2.3 Yield to Maturity
23.2.4 The Macaulay Model
23.3 Convesity
23.4 Contingent immunization
23.5 Bond portfolios: a case study
23.6 Summary
Questions and problems
BIBLIOGRAPHY
Chapter 24
Portfolio Insurance and Synthetic Options
24.1 BASIC CONCEPTS OF PORTFOLIO INSURANCE
24.2 STRATEGIES AND IMPLEMENTATION OF PORTFOLIO INSURANCE
24.2.1 Stop-Loss Orders
24.2.2 Portfolio Insurance with Listed Put Options
24.2.3 Portfolio Insurance with Synthetic Options
24.2.4 Portfolio Insurance with Dynamic Hedging
24.3 COMPARISON OF ALTERNATIVE PORTFOLIO-INSURANCE STRATEGIES
24.3.1 Synthetic Options
24.3.2 Listed Put Options
24.3.3 Dynamic Hedging and Listed Put Options
24.4 IMPACT OF PORTFOLIO INSURANCE ON THE STOCK MARKET AND PRICING OF EQUITIES
24.4.1 Regulation and the Brady Report
24.5 EMPIRICAL STUDIES OF PORTFOLIO INSURANCE
24.5.1 Leland (1985)
24.5.2 Asay and Edelsburg (1986)
24.5.3 Eizman (1986)
24.5.4 Rendleman and McEnally (1987)
24.5.5 Garcia and Gould (1987)
24.5.6 Zhu and Kavee (1988)
24.5.7 Perold and Sharpe (1988)
24.5.8 Rendleman and O’Brien (1990)
24.5.9 Loria, Pham, and Sim (1991)
24.5.10 Do and Faff (2004)
24.5.11 Cesari and Cremonini (2003)
24.5.12 Herald, Maurer, and Purschaker (2005)
24.5.13 Hamidi, Jurczenko, and Maillet (2007)
24.5.14 Ho, Cadle, and Theobald (2008)
24.6 SUMMARY
QUESTIONS AND PROBLEMS
BIBLIOGRAPHY
Project IV Mutual Fund, International Portfolio, and Bond Portfolio
Part V. Special Topics
Chapter 25
Capturing Equity Risk Premia
25.1 Global Equity Risk Model
25.1.1 Estimation Universe
25.1.2 GEM2 Factor Structure
25.2 Factor Portfolios
25.2.1 Simple Factor Portfolios
25.2.2 Pure Factor Portfolios
25.2.3 Optimized Factor Portfolios
25.3 Results
25.3.1 Cumulative Factor Returns
25.3.2 Summary Statistics
25.4 Leading Economic Indicators and Barra Factor Returns
summary
BIBLIOGRAPHY
Chapter 26
Simultaneous-Equation Approach for Security Valuation
26.1 Warren and Shelton model
26.2 Johnson & JOhnson AS A CASE STUDY
26.2.1 Data Sources and Parameter Estimations
26.2.2 Procedure for Calculating WS model
26.3 Francis and Rowell model
26.3.1 The FR Model Specification
26.3.2 A Brief Discussion of FR’s Empirical Results
26.4 FELTHAM–OHLSON MODEL FOR DETERMINING EQUITY VALUE
26.5 Summary
QUESTIONS AND PROBLEMS
Appendix 26A: PROCEDURE OF USING MICROSOFT EXCEL TO RUN FINPLAN PROGRAM
Appendix 26B: PROGRAM OF FINPLAN WITH AN EXAMPLE
BIBLIOGRAPHY
PowerPoint file Chapter 26 Appendix
Chapter 27
Itô’s Calculus and the Derivation of the Black–Scholes Option Pricing Model
27.1 THE ITô PROCESS AND FINANCIAL MODELINg
27.2 Itô LEMMA
27.3 STOCHASTIC DIFFERENTIAL-EQUATION APPROACH TO STOCK-PRICE BEHAVIOR
27.4 THE PRICING OF AN OPTION
27.5 A REEXAMINATION OF OPTION PRICING
27.6 REMARKS ON OPTION PRICING
27.7 SUMMARY
QUESTIONS AND PROBLEMS
APPENDIX 27A: AN ALTERNATIVE METHOD TO DERIVE THE BLACK–SCHOLES OPTION PRICING MODEL
27A.1 Assumptions and the Present Value of the Expected Terminal Option Price
27A.2 Present Value of the Partial Expectation of the Terminal Stock Price
27A.3 Present Value of the Exercise Price under Uncertainty
BIBLIOGRAPHY
PowerPoint file Chapter 27 Appendix
Appendix Tables
TABLES I COMPOUND SUM OF $1 FOR n YEARS
TABLE II PRESENT VALUE OF $1
TABLE III SUM OF AN ANNUAL FOR $1 FOR n YEAR
TABLE IV PRESENT VALUE OF $1 RECEIVED ANNUALLY
TABLE V AREAS UNDER THE STANDARD NORMAL DISTRIBUTION
Acknowledgements
Authors Index
Subject Index