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

    Chapter 1 Solutions

    PowerPoint file Chapter 1

 

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

   Chapter 2 Solutions

   PowerPoint file Chapter 2

   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

Chapter 3 Solutions

   PowerPoint file Chapter 3

   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 4 Solutions

PowerPoint file Chapter 4

 

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

Chapter 5 Solutions  

   PowerPoint file Chapter 5

   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

Chapter 6 Solutions

   PowerPoint file Chapter 6

   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 7 Solutions

PowerPoint file Chapter 7

 

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

Chapter 8 Solutions

   PowerPoint file Chapter 8

   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

Chapter 9 Solutions

   PowerPoint file Chapter 9

   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

Chapter 10 Solutions

   PowerPoint file Chapter 10

   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 KUHNTUCKER CONDITIONS

APPENDIX 11E: PORTFOLIO OPTIMIZATION WITH SHORT-SELLING CONSTRAINS

BIBLIOGRAPHY

Chapter 11 Solutions

PowerPoint file Chapter 11

   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 12 Solutions

PowerPoint file Chapter 12

 

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

Chapter 13 Solutions

   PowerPoint file Chapter 13

   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 14 Solutions

PowerPoint file Chapter 14 

 

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 15 Solutions

PowerPoint file Chapter 15

 

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

16.1.4 Additional Definitions and Distinguishing Features

16.1.5 Types of Underlying Asset

16.1.6 Institutional Characteristics

16.2 PUT–CALL PARITY

16.2.1 European Options

16.2.2 American Options

16.2.3 Futures Options

16.2.4 Market Application

16.3 RISKRETURN CHARACTERISTICS OF OPTIONS

16.3.1 Long call

16.3.2 Short Call

16.3.3 Long Put

16.3.4 Short Put

16.3.5 Long Straddle

16.3.6 Short Straddle

16.3.7 Long Vertical (Bull) Spread

16.3.8 Short Vertical (Bear) Spread

16.3.9 Calendar (Time) Spreads

16.4 Excel Approach to Analyze the Option Strategies

16.4.1 Long Straddle

16.4.2 Short Straddle

16.4.3 Long Vertical (Bull) Spread

16.4.4 Short Vertical (Bear) Spread

16.4.5 Protective Put

16.4.6 Covered Call

16.4.7 Collar

SUMMARY

QUESTIONS AND PROBLEMS

BIBLIOGRAPHY

Chapter 16 Solutions

PowerPoint file Chapter 16 

 

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

Chapter 17 Solutions

   PowerPoint file Chapter 17

   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    BLACKSCHOLES OPTION PRICING MODEL

18.6    RELATIONSHIP BETWEEN THE BINOMIAL OPTION PRICING MODEL AND THE BLACKSCHOLES OPTION PRICING MODEL

18.7    DECISION TREE BLACKSCHOLES CALCULATION

18.8    SUMMARY

QUESTIONS AND PROBLEMS

APPENDIX 18A: EXCEL VBA CODE BINOMIAL OPTION PRICING MODEL

BIBLIOGRAPHY

Chapter 18 Solutions

   PowerPoint file Chapter 18

   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

Chapter 19 Solutions

   PowerPoint file Chapter 19

   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

Chapter 20 Solutions

PowerPoint file Chapter 20

 

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

Chapter 21 Solutions

   PowerPoint file Chapter 21

   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

Chapter 22 Solutions

   PowerPoint file Chapter 22

   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 23 Solutions

PowerPoint file Chapter 23 

 

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

Chapter 24 Solutions

PowerPoint file Chapter 24

 

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 25 Solutions

   PowerPoint file Chapter 25 

 

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

Chapter 26 Solutions

    PowerPoint file Chapter 26

   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

Chapter 27 Solutions

   PowerPoint file Chapter 27

   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