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Handbook of Finance: Investment Management and Financial Management

Book Description

Volume II: Investment Management and Financial Management focuses on the theories, decisions, and implementations aspects associated with both financial management and investment management. It discusses issues that dominate the financial management arena—capital structure, dividend policies, capital budgeting, and working capital—and highlights the essential elements of today’s investment management environment, which include allocating funds across major asset classes and effectively dealing with equity and fixed income portfolios.

Incorporating timely research and in-depth analysis, the Handbook of Finance is a comprehensive 3-Volume Set that covers both established and cutting-edge theories and developments in finance and investing. Other volumes in the set: Handbook of Finance Volume I: Financial Markets and Instruments and Handbook of Finance Volume III: Valuation, Financial Modeling, and Quantitative Tools.

Table of Contents

  1. Copyright
  2. About the Editor
  3. Contributors
  4. Preface
    1. TOPIC CATEGORIES
  5. Guide to the Handbook of Finance
    1. ORGANIZATION
    2. TABLE OF CONTENTS
    3. INDEX
    4. CHAPTERS
      1. Outline
      2. Abstract
      3. Keywords
      4. Introduction
      5. Body
      6. Summary
      7. References
  6. 1. Investment Management
    1. 1. Portfolio Selection
      1. 1.1. SOME BASIC CONCEPTS
        1. 1.1.1. Utility Function and Indifference Curves
        2. 1.1.2. The Set of Efficient Portfolios and the Optimal Portfolio
        3. 1.1.3. Risky Assets versus Risk-Free Assets
      2. 1.2. MEASURING A PORTFOLIO'S EXPECTED RETURN
        1. 1.2.1. Measuring Single-Period Portfolio Return
        2. 1.2.2. The Expected Return of a Portfolio of Risky Assets
      3. 1.3. MEASURING PORTFOLIO RISK
        1. 1.3.1. Variance and Standard Deviation as a Measure of Risk
          1. 1.3.1.1. Standard Deviation
          2. 1.3.1.2. Measuring the Portfolio Risk of a Two-Asset Portfolio
          3. 1.3.1.3. Covariance
          4. 1.3.1.4. Relationship between Covariance and Correlation
        2. 1.3.2. Measuring the Risk of a Portfolio Comprised of More than Two Assets
      4. 1.4. PORTFOLIO DIVERSIFICATION
        1. 1.4.1. Portfolio Risk and Correlation
        2. 1.4.2. The Effect of the Correlation of Asset Returns on Portfolio Risk
      5. 1.5. CHOOSING A PORTFOLIO OF RISKY ASSETS
        1. 1.5.1. Constructing Efficient Portfolios
        2. 1.5.2. Feasible and Efficient Portfolios
        3. 1.5.3. Choosing the Optimal Portfolio in the Efficient Set
      6. 1.6. INDEX MODEL'S APPROXIMATIONS TO THE COVARIANCE STRUCTURE
        1. 1.6.1. Single-Index Market Model
        2. 1.6.2. Multi-Index Market Models
      7. 1.7. SUMMARY
    2. REFERENCES
    3. 2. Asset Pricing Models
      1. 2.1. CHARACTERISTICS OF AN ASSET PRICING MODEL
      2. 2.2. CAPITAL ASSET PRICING MODEL
        1. 2.2.1. Derivation of the CAPM
          1. 2.2.1.1. Assumptions
          2. 2.2.1.2. Capital Market Line
          3. 2.2.1.3. Systematic and Unsystematic Risk
          4. 2.2.1.4. Security Market Line
        2. 2.2.2. Tests of the CAPM
        3. 2.2.3. Modifications of the CAPM
      3. 2.3. ARBITRAGE PRICING THEORY MODEL
        1. 2.3.1. Arbitrage Principle
        2. 2.3.2. APT Model Formulation
      4. 2.4. MULTIFACTOR RISK MODELS IN PRACTICE
        1. 2.4.1. Statistical Factor Models
        2. 2.4.2. Macroeconomic Factor Models
        3. 2.4.3. Fundamental Factor Models
      5. 2.5. SUMMARY
    4. REFERENCES
    5. 3. Stochastic Growth and Discretionary Wealth
      1. 3.1. STOCHASTIC GROWTH
        1. 3.1.1. The Centrality of Logarithmic Returns
        2. 3.1.2. The Importance of Symmetry
          1. 3.1.2.1. The Distribution of Logarithmic Wealth Tends to Be Symmetrical
          2. 3.1.2.2. Mapping Mean Logarithmic Wealth into Median Wealth
        3. 3.1.3. Dealing with Exceptions
          1. 3.1.3.1. The Shortfall Case
          2. 3.1.3.2. Limited Lifetimes
          3. 3.1.3.3. The Dynamic Hedging Case
        4. 3.1.4. An Operational Stochastic Growth Objective
      2. 3.2. EXPECTED GROWTH WITH NO SHORTFALL CONCERNS
        1. 3.2.1. Finding the Optimum Risk
        2. 3.2.2. Maximum Expected Growth for Aggressive Investors
          1. 3.2.2.1. Taylor Series Representation
          2. 3.2.2.2. Back to Markowitz
          3. 3.2.2.3. Questions of Existence and Convergence
          4. 3.2.2.4. Adjustments for Limited Lifetimes
      3. 3.3. MANAGING AGAINST A SHORTFALL CONSTRAINT
        1. 3.3.1. Managing Discretionary Wealth
          1. 3.3.1.1. The Implicit Balance Sheet
          2. 3.3.1.2. Shortfalls Summarized as Zero Discretionary Wealth
          3. 3.3.1.3. Dynamic Reaction
          4. 3.3.1.4. Response to Old Objections
        2. 3.3.2. Objective for Investors Avoiding Positive Wealth Shortfalls
        3. 3.3.3. Implication for Markowitz Mean-Variance Optimization
        4. 3.3.4. Higher-Moment Optimization
          1. 3.3.4.1. When Higher Moments Are Important
          2. 3.3.4.2. Operational Use of Higher Moments
        5. 3.3.5. Bayesian Modification
        6. 3.3.6. Other Applications
          1. 3.3.6.1. Performance Reporting
          2. 3.3.6.2. Getting Stuck with CPPI
          3. 3.3.6.3. Understanding Markets
      4. 3.4. RELATED RESEARCH
      5. 3.5. SUMMARY
    6. REFERENCES
    7. 4. Why Quantitative Investment Management?
      1. 4.1. WHY BE A QUANTITATIVE INVESTOR?
        1. 4.1.1. Human Nature Was Not Designed for Investing in Liquid Competitive Markets
        2. 4.1.2. The Advantage of the Scientific Method
        3. 4.1.3. Efficient Diversification
        4. 4.1.4. Identifying Market Inefficiencies
      2. 4.2. THE ARGUMENT FOR JUDGMENTAL INVESTING
      3. 4.3. SYNTHESIS OF QUALITATIVE AND QUANTITATIVE APPROACHES
      4. 4.4. SUMMARY
    8. REFERENCES
    9. 5. Quantitative Investment Management: Today and Tomorrow
      1. 5.1. USING DERIVATIVES IN PORTFOLIO MANAGEMENT
      2. 5.2. CURRENCY MANAGEMENT
      3. 5.3. BENCHMARKS
      4. 5.4. QUANTITATIVE RETURN-FORECASTING TECHNIQUES AND MODEL-BASED TRADING STRATEGIES
        1. 5.4.1. Momentum and Reversal Strategies
        2. 5.4.2. Models Based on Exogenous Predictors
        3. 5.4.3. More Sophisticated Econometric Models
        4. 5.4.4. Model Selection and Testing
      5. 5.5. TRADE EXECUTION AND ALGORITHMIC TRADING
      6. 5.6. SUMMARY
    10. REFERENCES
    11. 6. Actuaries' Evaluation of the Utility of Financial Economics
      1. 6.1. ACTUARIES: FINANCIAL ECONOMISTS IN THRALL TO THE MARKET
      2. 6.2. THREE DIVISIONS OF FINANCIAL ECONOMICS
      3. 6.3. MATHEMATICAL FINANCE
      4. 6.4. THE CAPITAL ASSET PRICING MODEL
      5. 6.5. THE EFFICIENT MARKET HYPOTHESIS
      6. 6.6. INVESTMENT STRATEGIES FOR PENSION FUNDS
      7. 6.7. SUMMARY
    12. REFERENCES
    13. 7. Investment Beliefs
      1. 7.1. WHYDOWENEED INVESTMENT BELIEFS?
      2. 7.2. HOW DO WE KNOW WHAT WE KNOW?
      3. 7.3. WHAT DO WE KNOW?
      4. 7.4. WHAT DON'T WE KNOW?
      5. 7.5. WHAT DO WE BELIEVE?
      6. 7.6. INVESTMENT BELIEFS AND STRATEGY
      7. 7.7. SUMMARY
      8. 7.8. ACKNOWLEDGMENTS
    14. REFERENCES
    15. 8. Behavioral Finance
      1. 8.1. THE MARKET AS A COLLECTION OF INDIVIDUAL BEHAVIORS
        1. 8.1.1. Realistic Individual Decision Making
          1. 8.1.1.1. Satisficing and Heuristics
          2. 8.1.1.2. Representativeness
          3. 8.1.1.3. Availability
          4. 8.1.1.4. Anchoring and Adjustment
          5. 8.1.1.5. Cognitive Dissonance
        2. 8.1.2. The Market Is More than the Sum of Nearly Identical Parts
          1. 8.1.2.1. Heterogeneity of Decision Rules
          2. 8.1.2.2. Social Psychology and Group Influence
          3. 8.1.2.3. Laboratory Markets
          4. 8.1.2.4. Artificial Markets
      2. 8.2. APPLYING THE PRINCIPLES OF BEHAVIORAL FINANCE
        1. 8.2.1. Hypotheses and Studies of Market Anomalies
        2. 8.2.2. Commentary on Grand Theory
      3. 8.3. SUMMARY
    16. REFERENCES
    17. 9. What Is Behavioral Finance?
      1. 9.1. "NORMAL" INVESTORS AND RATIONAL ONES
      2. 9.2. BEHAVIORAL PORTFOLIO THEORY
      3. 9.3. BEHAVIORAL ASSET PRICING MODEL
      4. 9.4. MARKET EFFICIENCY
      5. 9.5. ELEGANT THEORIES AND TESTABLE HYPOTHESES
      6. 9.6. SUMMARY
    18. REFERENCES
    19. 10. The Psychology of Risk: The Behavioral Finance Perspective
      1. 10.1. WHAT IS RISK PERCEPTION?
      2. 10.2. WHAT IS PERCEPTION?
        1. 10.2.1. A Visual Presentation of the Perceptual Process: The Litterer Perception Formation Model
      3. 10.3. JUDGMENT AND DECISION MAKING: HOW DO INVESTORS PROCESS INFORMATION WITHIN ACADEMIC FINANCE?
        1. 10.3.1. The Standard Finance Viewpoint: The Efficient Market Hypothesis
        2. 10.3.2. The Behavioral Finance Perspective: The Significance of Information Overload and the Role of Cognitive Factors
      4. 10.4. FINANCIAL AND INVESTMENT DECISION MAKING: ISSUES OF RATIONALITY
        1. 10.4.1. The Standard Finance Viewpoint: Classical Decision Theory
      5. 10.5. The Behavioral Finance Perspective: Behavioral Decision Theory
      6. 10.6. WHAT ARE THE MAIN THEORIES AND CONCEPTS FROM BEHAVIORAL FINANCE THAT INFLUENCE AN INDIVIDUAL'S PERCEPTION OF RISK?
        1. 10.6.1. Heuristics
          1. 10.6.1.1. Availability Heuristic
        2. 10.6.2. Overconfidence
        3. 10.6.3. Prospect Theory
        4. 10.6.4. Loss Aversion
        5. 10.6.5. Representativeness
        6. 10.6.6. Framing
        7. 10.6.7. Anchoring
        8. 10.6.8. Familiarity Bias
        9. 10.6.9. The Issue of Perceived Control
        10. 10.6.10. The Significance of Expert Knowledge
        11. 10.6.11. The Role of Affect (Feelings)
        12. 10.6.12. The Influence of Worry
      7. 10.7. SUMMARY
      8. 10.8. ACKNOWLEDGMENTS
    20. REFERENCES
    21. 11. Investment Strategy for the Long Term
      1. 11.1. MAKING SAVING AND SPENDING DECISIONS
      2. 11.2. UNDERSTANDING THE REPRESENTATIVE INVESTOR
      3. 11.3. PREDICTABLE INEFFICIENCIES
      4. 11.4. USING ESTIMATES OF BETA
      5. 11.5. SUMMARY
    22. REFERENCES
    23. 12. Implementing Investment Strategies: The Art and Science of Investing
      1. 12.1. WHY TRADING IS NOT LIKE PORTFOLIO MANAGEMENT
        1. 12.1.1. Trade Motivation
        2. 12.1.2. Assessing Market Conditions
        3. 12.1.3. Establish Initial Trading Strategy
        4. 12.1.4. Probing for Liquidity and Information
        5. 12.1.5. Adapting to Market Conditions
        6. 12.1.6. Assess Effectiveness
      2. 12.2. A FRAMEWORK FOR MEASURING IMPLEMENTATION
      3. 12.3. THE COST COMPONENTS OF TRADING
        1. 12.3.1. Commission
        2. 12.3.2. Price Impact Cost
        3. 12.3.3. Trader Timing Cost
        4. 12.3.4. Opportunity Cost
      4. 12.4. TRENDS IN TRADING COSTS
      5. 12.5. BEST EXECUTION
      6. 12.6. INTEGRATING TRANSACTION COSTS AND BEST EXECUTION INTO THE INVESTING PROCESS
        1. 12.6.1. Case Study 1: Momentum Manager Mismatched with Cautious Trader
        2. 12.6.2. Case 2: Capturing an Insufficient Concession When Providing Liquidity
        3. 12.6.3. Case 3: Overreliance on Low-Cost Brokers
      7. 12.7. FOUR PRACTICAL TRADING RECOMMENDATIONS
        1. 12.7.1. Recommendation 1: One Trading Strategy Does Not Fit All Situations
        2. 12.7.2. Recommendation 2: Prioritize and Make Contingency Plans
        3. 12.7.3. Recommendation 3: Build Expected Costs into Portfolio Decision Making
        4. 12.7.4. Recommendation 4: Rationalize Broker Use
      8. 12.8. SUMMARY
    24. REFERENCES
    25. 13. Investment Management for Taxable Investors
      1. 13.1. INVESTMENT DECISIONS IN THE PRESENCE OF TAXES
        1. 13.1.1. Types of Taxes
          1. 13.1.1.1. Taxes on Capital Gains
          2. 13.1.1.2. Taxes on Dividends
          3. 13.1.1.3. Taxes on Estates
          4. 13.1.1.4. After-Tax Performance Measurement
        2. 13.1.2. After-Tax Performance Evaluation
        3. 13.1.3. Performance Benchmarking
        4. 13.1.4. After-Tax Risk
        5. 13.1.5. After-Tax Asset Allocation
        6. 13.1.6. Investment Vehicle
      2. 13.2. PORTFOLIO MANAGEMENT SOLUTIONS
        1. 13.2.1. The Power of Passive Investing
        2. 13.2.2. Active Tax Management
        3. 13.2.3. Active Stock Selection
      3. 13.3. SUMMARY
    26. REFERENCES
    27. 14. Socially Responsible Investment
      1. 14.1. BASIC CONCEPTS
        1. 14.1.1. Definitions of Socially Responsible Investment
        2. 14.1.2. SRI Is Equity Based
        3. 14.1.3. Community Development or Ethical Banking
        4. 14.1.4. Relationship between SRI and "Green" Investing
        5. 14.1.5. Importance of Financial Returns
        6. 14.1.6. Identifying SRI Demand Factors
        7. 14.1.7. Historic Origins of SRI
      2. 14.2. SRI STRATEGIES
        1. 14.2.1. Exclusion or Negative Screening
        2. 14.2.2. Exclusion Levels and Investors' Portfolio Approach
        3. 14.2.3. Shareholder Activism
        4. 14.2.4. SRI Activism
        5. 14.2.5. Nongovernmental Organization Advocacy Contrasted with SRI Activism
        6. 14.2.6. Engagement or Dialogue
        7. 14.2.7. Collaborative Engagement
      3. 14.3. LEGAL FRAMEWORK
        1. 14.3.1. Legal Inhibitions
        2. 14.3.2. New Pension Regulations
        3. 14.3.3. Legal Background to Activism
      4. 14.4. IMPACT ON FINANCIAL PERFORMANCE
        1. 14.4.1. A Brief Review of the Literature
        2. 14.4.2. The Performance of Retail SRI Funds
        3. 14.4.3. The Question of Materiality
      5. 14.5. OUTSTANDING QUESTIONS
        1. 14.5.1. Sinstocks: An Exogenous Variable?
        2. 14.5.2. Scope for Deeper Analysis
        3. 14.5.3. Distinction between Institutional and Retail SRI
        4. 14.5.4. Public Policy Issues
      6. 14.6. SUMMARY
    28. REFERENCES
    29. 15. Employing Portfolio Selection Models in Practice
      1. 15.1. A REVIEW OF EXISTING MODELS
        1. 15.1.1. Mean-Variance Optimization
        2. 15.1.2. Black-Litterman Approach
        3. 15.1.3. Minimizing Expected Shortfall
      2. 15.2. EMPIRICAL ISSUES
        1. 15.2.1. Volatility of Returns
        2. 15.2.2. Correlation of Returns
        3. 15.2.3. Excess Returns
        4. 15.2.4. Joint Distribution Specification
      3. 15.3. INCLUDING LIABILITY CONSTRAINTS
        1. 15.3.1. Modeling Pension Liabilities
        2. 15.3.2. Practical Difficulties
      4. 15.4. A REAL-WORLD EXAMPLE
        1. 15.4.1. Service Cost
        2. 15.4.2. Strategic Asset Allocation
      5. 15.5. SUMMARY
    30. REFERENCES
    31. 16. Asset Allocation and Portfolio Construction
      1. 16.1. ASSET ALLOCATION
        1. 16.1.1. Strategic versus Tactical Allocation
        2. 16.1.2. Tactical Asset Allocation and Tactical Style Allocation Decisions
      2. 16.2. IMPLEMENTING ASSET ALLOCATION DECISION AND PORTFOLIO CONSTRUCTION
        1. 16.2.1. Using Forecasts
        2. 16.2.2. Applying the Markowitz Model
        3. 16.2.3. Alternative Models to Markowitz
        4. 16.2.4. Stock Selection
      3. 16.3. SUMMARY
    32. REFERENCES
    33. 17. Asset Allocation Barbells
      1. 17.1. INDEX, CORE, AND HEDGE FUNDS
        1. 17.1.1. Benchmark
        2. 17.1.2. Active Bets
        3. 17.1.3. Active Return
        4. 17.1.4. Active Risk
        5. 17.1.5. Tracking Risk
        6. 17.1.6. Tracking Error
        7. 17.1.7. Information Ratio
      2. 17.2. TURNING A HEDGE FUND INTO A CORE PRODUCT
        1. 17.2.1. Would the Transaction Really Be So Easy?
      3. 17.3. TURNING A CORE MANAGER INTO A HEDGE FUND MANAGER
        1. 17.3.1. Management Fees
      4. 17.4. SUMMARY
    34. REFERENCES
    35. 18. The Fallacy of Portable Alpha
      1. 18.1. WHAT IS PORTABLE ALPHA?
      2. 18.2. THE INVARIANCE OF PORTABLE AND FIXED ALPHA
        1. 18.2.1. The Inefficiency of 130–30 Strategies
      3. 18.3. SUMMARY
    36. REFERENCES
    37. 19. Currency Overlay
      1. 19.1. THE MATHEMATICS OF CURRENCY OVERLAY MANAGEMENT
        1. 19.1.1. Some Conventions
        2. 19.1.2. Currency Hedging Taxonomy
          1. 19.1.2.1. Full or Unitary Hedging
          2. 19.1.2.2. Partial Hedging
          3. 19.1.2.3. Overhedging
          4. 19.1.2.4. Cross-Hedging
        3. 19.1.3. Basic Overlay Model
        4. 19.1.4. Fully Interdependent Solution
        5. 19.1.5. Active Overlay and Risk Overlay
        6. 19.1.6. Practical Considerations
        7. 19.1.7. Who Should Invest in a Currency Overlay?
      2. 19.2. ACTIVE CURRENCY OVERLAY
        1. 19.2.1. Common Strategies
          1. 19.2.1.1. Currency Alpha
          2. 19.2.1.2. Carry Strategies
          3. 19.2.1.3. Momentum Strategies
          4. 19.2.1.4. Flow Strategies
          5. 19.2.1.5. Valuation Strategies
          6. 19.2.1.6. Quantitative Currency Overlay
        2. 19.2.2. Active Portfolio Construction and Currency Perspective
        3. 19.2.3. Strategy Weighting
          1. 19.2.3.1. Portfolio Optimization
          2. 19.2.3.2. Regime-Based Weightings
          3. 19.2.3.3. Performance-Based Weightings
          4. 19.2.3.4. Strategy Termination
      3. 19.3. SUMMARY
    38. REFERENCES
    39. 20. Risk Assessment and Portfolio Construction
      1. 20.1. PORTFOLIO RISK FORECASTING
        1. 20.1.1. Estimating Variances
          1. 20.1.1.1. Enough Observations
          2. 20.1.1.2. Downward Bias
          3. 20.1.1.3. Dispersion in the Estimate of the Mean
          4. 20.1.1.4. Unstable Parameters
          5. 20.1.1.5. Indicators
          6. 20.1.1.6. Wasted Information
        2. 20.1.2. Estimating Correlations
          1. 20.1.2.1. Higher Frequency Observations
          2. 20.1.2.2. Problem Size Dependency
          3. 20.1.2.3. Types of Solutions to the Size Problem
          4. 20.1.2.4. Winsorization
          5. 20.1.2.5. Structuring Correlation Estimates by Factor Analysis
          6. 20.1.2.6. Is Diversification There When You Need It?
          7. 20.1.2.7. Bayesian Shrinkage
        3. 20.1.3. Value at Risk
        4. 20.1.4. Higher Moment Risk
      2. 20.2. PORTFOLIO CONSTRUCTION
        1. 20.2.1. Coping with Key Assumptions
          1. 20.2.1.1. Application to the Relevant Mean and Variance
        2. 20.2.2. Risk Aversion Is Known
          1. 20.2.2.1. Single-Period Model
          2. 20.2.2.2. Adequacy of Variance as a Risk Measure
          3. 20.2.2.3. Single-Point Estimates of Mean and Variance
          4. 20.2.2.4. Adequate Computational Facility
        3. 20.2.3. Additional Practical Considerations
          1. 20.2.3.1. Sensitivity to Input Changes
          2. 20.2.3.2. Constraints
          3. 20.2.3.3. Trade Management
          4. 20.2.3.4. Multiple Levels
          5. 20.2.3.5. Simulation Capability
      3. 20.3. SUMMARY
    40. REFERENCES
    41. 21. Risk Budgeting
      1. 21.1. WHY DO WE CARE ABOUT RISK?
        1. 21.1.1. Introducing Risk
        2. 21.1.2. Introduction to Mean-Variance Analysis
        3. 21.1.3. Justification for Risk and Return Trade-off
      2. 21.2. MEASUREMENT OF RISK
        1. 21.2.1. Discrete and Continuous Distributions
        2. 21.2.2. Traditional Measures
          1. 21.2.2.1. Variance and Standard Deviation
          2. 21.2.2.2. Covariance and Correlation
        3. 21.2.3. Other Risk Measures
          1. 21.2.3.1. Skewness
          2. 21.2.3.2. Kurtosis
          3. 21.2.3.3. Semivariance
        4. 21.2.4. Value at Risk
          1. 21.2.4.1. Definition
          2. 21.2.4.2. Normal Distribution and VaR
        5. 21.2.5. Calculus of Risk
          1. 21.2.5.1. Time Aggregation of Risk and Return
          2. 21.2.5.2. Excess Return and Tracking Error
        6. 21.2.6. Risk Calculation Example
      3. 21.3. RISK BUDGETING
        1. 21.3.1. Example: Two Risky Assets
          1. 21.3.1.1. The Starting Portfolio
          2. 21.3.1.2. Marginal Contribution to Risk
        2. 21.3.2. Implied View Analysis
        3. 21.3.3. The Role of Correlation
      4. 21.4. APPLICATIONS
        1. 21.4.1. Pension Fund Example
      5. 21.5. ADVANCED CONCEPTS
        1. 21.5.1. Estimating Volatility
        2. 21.5.2. Time Aggregation of Risks
        3. 21.5.3. Critique of VaR
      6. 21.6. SUMMARY
    42. REFERENCES
    43. 22. Introduction to Performance Analysis
      1. 22.1. INTERNATIONAL PERFORMANCE MEASUREMENT STANDARDIZATION PROCESS
        1. 22.1.1. Risk-Adjusted Measure
        2. 22.1.2. Indices and Benchmarking
        3. 22.1.3. Debate on Size and Book-to-Market Factors
      2. 22.2. USE OF BENCHMARKS
        1. 22.2.1. Generic Indices
        2. 22.2.2. Customized Benchmarks and Normal Portfolios
      3. 22.3. ANALYSIS OF ALPHAS
        1. 22.3.1. Different Models for Normal Returns: Academic Approach
          1. 22.3.1.1. Market Models
          2. 22.3.1.2. Multifactor Models
          3. 22.3.1.3. Style Analysis
        2. 22.3.2. Evaluating Alphas: Practitioners' Approach
          1. 22.3.2.1. Performance Relative to a Peer Group
          2. 22.3.2.2. Performance Relative to a Benchmark
      4. 22.4. PERFORMANCE ATTRIBUTION
      5. 22.5. "PERFORMANCE IS THE PRODUCT"
        1. 22.5.1. Fund Performance Rating
      6. 22.6. SUMMARY
    44. REFERENCES
    45. 23. Evaluating Portfolio Performance: LPM-Based Risk Measures and the Mean-Equivalence Approach
      1. 23.1. PORTFOLIO SELECTION UNDER UNCERTAINTY
        1. 23.1.1. Mean-Variance Model
        2. 23.1.2. Stochastic Dominance Framework as an Alternative to M-V Model
        3. 23.1.3. Mean–Lower Partial Moment Framework
      2. 23.2. LPM-CAPM
      3. 23.3. EVALUATION OF PORTFOLIO PERFORMANCE IN LPM-CAPM FRAMEWORK
      4. 23.4. MEAN-EQUIVALENCE APPROACH
      5. 23.5. NUMERICAL EXAMPLE
      6. 23.6. SUMMARY
    46. REFERENCES
  7. 2. Equity Portfolio Management
    1. 24. Overview of Active Common Stock Portfolio Strategies
      1. 24.1. TOP-DOWN VERSUS BOTTOM-UP APPROACHES
      2. 24.2. FUNDAMENTAL VERSUS TECHNICAL ANALYSIS
      3. 24.3. STRATEGIES BASED ON TECHNICAL ANALYSIS
        1. 24.3.1. Dow Theory
        2. 24.3.2. Simple Filter Rules
        3. 24.3.3. Moving Averages
        4. 24.3.4. Advance/Decline Line
        5. 24.3.5. Relative Strength
        6. 24.3.6. Price and Trading Relationship
        7. 24.3.7. Short Interest Ratio
        8. 24.3.8. Linear and Nonlinear Dynamic Models
        9. 24.3.9. Market Overreaction
      4. 24.4. STRATEGIES BASED ON FUNDAMENTAL ANALYSIS
        1. 24.4.1. Earnings Surprises
        2. 24.4.2. Low Price-Earnings Ratio
        3. 24.4.3. Market-Neutral Long-Short Strategy
        4. 24.4.4. Market Anomaly Strategies
          1. 24.4.4.1. Small-Firm Effect
          2. 24.4.4.2. Low P/E Effect
          3. 24.4.4.3. Neglected-Firm Effect
          4. 24.4.4.4. Calendar Effects
          5. 24.4.4.5. Following Insider Activity
        5. 24.4.5. Equity Style Management
          1. 24.4.5.1. Types of Equity Styles
          2. 24.4.5.2. Style Classification Systems
          3. 24.4.5.3. Strategies Based on Mathematical Models
      5. 24.5. SUMMARY
    2. REFERENCES
    3. 25. Investment Analysis: Profiting from a Complex Equity Market
      1. 25.1. AN INTEGRATED APPROACH TO A SEGMENTED MARKET
        1. 25.1.1. A Coherent Framework
      2. 25.2. DISENTANGLING
        1. 25.2.1. Noise Reduction
        2. 25.2.2. Return Revelation
        3. 25.2.3. Predictive Power
        4. 25.2.4. Additional Complexities
      3. 25.3. CONSTRUCTING, TRADING, AND EVALUATING PORTFOLIOS
      4. 25.4. PROFITING FROM COMPLEXITY
      5. 25.5. SUMMARY
    4. REFERENCES
    5. 26. Investment Management: An Architecture for the Equity Market
      1. 26.1. ARCHITECTURE
      2. 26.2. TRADITIONAL ACTIVE MANAGEMENT
        1. 26.2.1. Cognitive Errors
          1. 26.2.1.1. Loss Aversion: The "Better Not Take the Chance/What the Heck" Paradox
          2. 26.2.1.2. Endowment Effect: The "Pride in Ownership" Syndrome
          3. 26.2.1.3. The Gambler's Fallacy: "Hot Streaks, Empty Wallets"
          4. 26.2.1.4. Confirmation Bias: "Don't Confuse Me with the Facts"
        2. 26.2.2. Constructing Portfolios
      3. 26.3. PASSIVE MANAGEMENT
      4. 26.4. ENGINEERED MANAGEMENT
        1. 26.4.1. Engineering Portfolios
      5. 26.5. MEETING CLIENT NEEDS
        1. 26.5.1. Expanding Opportunities
        2. 26.5.2. Long-Short Portfolios
      6. 26.6. THE RISK-RETURN CONTINUUM
      7. 26.7. THE ULTIMATE OBJECTIVE
      8. 26.8. SUMMARY
    6. REFERENCES
    7. 27. Portfolio Construction with Active Managers: An Integrated Approach
      1. 27.1. ALPHA: THE FOUNDATION OF ACTIVE INVESTING
        1. 27.1.1. Comparing Beta and Alpha
        2. 27.1.2. Benefits of Alpha
      2. 27.2. CHALLENGES IN CONSTRUCTING PORTFOLIOS WITH ACTIVE MANAGERS
      3. 27.3. CURRENT APPROACHES TO ACTIVE INVESTMENT MANAGEMENT
        1. 27.3.1. Selecting Active Managers on the Basis of Beta Characteristics
        2. 27.3.2. Core Satellite
        3. 27.3.3. Portable Alpha
      4. 27.4. A NEW APPROACH TO ACTIVE INVESTING
        1. 27.4.1. Measuring Performance
          1. 27.4.1.1. Accounting for Measurement Biases
          2. 27.4.1.2. Separating Historical Returns into Alpha and Beta
        2. 27.4.2. Projecting Manager Performance
        3. 27.4.3. Quantifying Unique Manager Risks
        4. 27.4.4. Constructing Portfolios
      5. 27.5. PERFORMANCE IN PRACTICE
      6. 27.6. SUMMARY
      7. 27.7. ACKNOWLEDGMENTS
    8. REFERENCES
    9. 28. Quantitative Modeling of Transaction and Trading Costs
      1. 28.1. IMPLICIT TRANSACTION COSTS
        1. 28.1.1. Investment Delay
        2. 28.1.2. Market Impact Cost
        3. 28.1.3. Price Movement Risk
        4. 28.1.4. Market Timing Cost
        5. 28.1.5. Opportunity Cost
      2. 28.2. MARKET IMPACT MEASUREMENTS
      3. 28.3. FORECASTING AND MODELING MARKET IMPACT
        1. 28.3.1. A Factor-Based Market Impact Model
      4. 28.4. INCORPORATING TRANSACTION COSTS IN ASSET ALLOCATION MODELS
      5. 28.5. OPTIMAL TRADING
      6. 28.6. SUMMARY
    10. REFERENCES
    11. 29. Quantitative Equity Portfolio Management
      1. 29.1. TRADITIONAL AND QUANTITATIVE APPROACHES TO EQUITY PORTFOLIO MANAGEMENT
      2. 29.2. FORECASTING STOCK RETURNS, RISKS, AND TRANSACTION COSTS
        1. 29.2.1. Forecasting Returns
        2. 29.2.2. Forecasting Risks
        3. 29.2.3. Forecasting Transaction Costs
      3. 29.3. CONSTRUCTING PORTFOLIOS
      4. 29.4. TRADING
      5. 29.5. EVALUATING RESULTS AND UPDATING THE PROCESS
      6. 29.6. SUMMARY
    12. REFERENCES
    13. 30. Growth and Value Investing—Keeping in Style
      1. 30.1. EVOLUTION OF SPECIFIC EQUITY STYLES
      2. 30.2. CONSULTANTS, BENCHMARKS, AND BOXES
      3. 30.3. VALUE MANAGER TECHNIQUES AND FACTORS
      4. 30.4. GROWTHMANAGER TECHNIQUES AND FACTORS
      5. 30.5. PASSIVE APPROACHES TO STYLE—WE NEED INDICES
      6. 30.6. LONG-RUN BEHAVIOR OF GROWTH VERSUS VALUE
      7. 30.7. GROWTH VERSUS VALUE REGIMES: THE LONG AND SHORT OF IT
      8. 30.8. SUMMARY
    14. REFERENCES
    15. 31. Fundamental Multifactor Equity Risk Models
      1. 31.1. MODEL DESCRIPTION AND ESTIMATION
      2. 31.2. RISK DECOMPOSITION
        1. 31.2.1. Total Risk Decomposition
        2. 31.2.2. Systematic-Residual Risk Decomposition
        3. 31.2.3. Active Risk Decomposition
        4. 31.2.4. Active Systematic-Active Residual Risk Decomposition
        5. 31.2.5. Summary of Risk Decomposition
      3. 31.3. APPLICATIONS IN PORTFOLIO CONSTRUCTION AND RISK CONTROL
        1. 31.3.1. Assessing the Exposure of a Portfolio
        2. 31.3.2. Risk Control Against a Stock Market Index
        3. 31.3.3. Tilting a Portfolio
      4. 31.4. SUMMARY
    16. REFERENCES
    17. 32. Tracking Error and Common Stock Portfolio Management
      1. 32.1. DEFINITION OF TRACKING ERROR
        1. 32.1.1. Tracking Error for an Active/Passive Portfolio
      2. 32.2. COMPONENTS OF TRACKING ERROR
      3. 32.3. FORWARD-LOOKING VERSUS BACKWARD-LOOKING TRACKING ERROR
      4. 32.4. INFORMATION RATIO
      5. 32.5. DETERMINANTS OF TRACKING ERROR
        1. 32.5.1. Number of Stocks in the Portfolio
        2. 32.5.2. Portfolio Market Cap and Style Difference Relative to the Benchmark
        3. 32.5.3. Sector Deviation from the Benchmark
        4. 32.5.4. Market Volatility
        5. 32.5.5. Portfolio Beta
      6. 32.6. MARGINAL CONTRIBUTION TO TRACKING ERROR
      7. 32.7. SUMMARY
    18. REFERENCES
    19. 33. Long-Short Equity Portfolios
      1. 33.1. CONSTRUCTING A MARKET-NEUTRAL PORTFOLIO
        1. 33.1.1. Market Neutrality Illustrated
      2. 33.2. THE IMPORTANCE OF INTEGRATED OPTIMIZATION
        1. 33.2.1. The Real Benefits of Long-Short
      3. 33.3. ADDING BACK A MARKET RETURN
        1. 33.3.1. Return Transportability
        2. 33.3.2. Enhanced Active 120-20 Portfolio
      4. 33.4. SOME CONCERNS ADDRESSED
      5. 33.5. EVALUATING LONG-SHORT
      6. 33.6. SUMMARY
    20. REFERENCES
    21. 34. A Support Level for Technical Analysis
      1. 34.1. DYNAMIC PRICE DISCOVERY
        1. 34.1.1. Investor Behavior
        2. 34.1.2. Analytic Context
        3. 34.1.3. How the Participants Communicate
        4. 34.1.4. A Static Framework
        5. 34.1.5. A Dynamic Framework
      2. 34.2. QUANTITY DISCOVERY
      3. 34.3. TWO-SIDED MARKETS
      4. 34.4. TECHNICAL ANALYSIS
      5. 34.5. TOWARD TECHNICAL ANALYSIS TERRITORY
        1. 34.5.1. Efficient Market Hypothesis (EMH)
        2. 34.5.2. Trading the Order Flow
      6. 34.6. TECHNICAL ANALYSIS AND ALGORITHMIC TRADING
        1. 34.6.1. Algorithmic Trading versus Technical Analysis
        2. 34.6.2. Algorithmic Trading and Quantity Discovery
        3. 34.6.3. Where the Rubber Meets the Road
        4. 34.6.4. Trading Tools and More
        5. 34.6.5. Human Algo Traders
      7. 34.7. SUMMARY
      8. 34.8. APPENDIX: ORDER HANDLING AND MARKET TIMING ON A TRADING FLOOR
    22. REFERENCES
    23. 35. Volatility and Structure: Building Blocks of Classical Chart Pattern Analysis
      1. 35.1. PRICE CHART PRIMER
      2. 35.2. CLASSICAL CHART PATTERN EVOLUTION
      3. 35.3. CLASSICAL CHART PATTERN BASICS
      4. 35.4. ROLE OF CLASSICAL CHART PATTERNS
      5. 35.5. STRENGTHS AND WEAKNESSES OF CHART PATTERNS
      6. 35.6. THE MODEL
      7. 35.7. THE VOLATILITY COMPONENT
      8. 35.8. THE STRUCTURE COMPONENT
      9. 35.9. SCREENING EXAMPLES
        1. 35.9.1. Adobe (ADBE)
        2. 35.9.2. Sysco (SYY)
      10. 35.10. SUMMARY
    24. REFERENCES
    25. 36. Incorporating Trading Strategies in the Black-Litterman Framework
      1. 36.1. PROBLEMS ENCOUNTERED IN MEAN-VARIANCE OPTIMIZATION IN PRACTICE
      2. 36.2. THE BLACK-LITTERMAN MODEL
        1. 36.2.1. Step 1: Basic Assumptions and Starting Point
        2. 36.2.2. Step 2: Expressing an Investor's Views
        3. 36.2.3. Step 3: Combining an Investor's Views with Market Equilibrium
        4. 36.2.4. Some Properties of the Black-Litterman Model
          1. 36.2.4.1. Absence of Views
          2. 36.2.4.2. A Confidence Weighted Expected Return
          3. 36.2.4.3. The Black-Litterman Expected Returns as the Solution of an Optimization Problem
          4. 36.2.4.4. The Covariance Matrix of the Black-Litterman Returns
          5. 36.2.4.5. How the Influence of Estimation Errors Is Mitigated
        5. 36.2.5. Incorporating Trading Strategies in the Black-Litterman Model
          1. 36.2.5.1. Factor Models
          2. 36.2.5.2. Cross-Sectional Rankings
          3. 36.2.5.3. Determining the Confidence Level
      3. 36.3. AN EXAMPLE
        1. 36.3.1. A Cross-Sectional Momentum Strategy
        2. 36.3.2. Incorporating the Momentum Strategy in the Black-Litterman Model
      4. 36.4. SUMMARY
    26. REFERENCES
    27. 37. The Blindness of Hindsight in Finance
      1. 37.1. SURPRISE! SURPRISE!
      2. 37.2. THE BLINDNESS OF HINDSIGHT
      3. 37.3. THE UNEXPECTED ROLE OF THEORY
      4. 37.4. THE TREACHERY OF NUMBERS
      5. 37.5. THE COMPUTER: FRIEND OR FOE?
      6. 37.6. SUMMARY
    28. REFERENCES
    29. 38. Are Stock Prices Predictable?
      1. 38.1. THE THEORY OF SPECULATION
      2. 38.2. CHARLES DOW AND THE DOW THEORY
      3. 38.3. COWLES'S DAMNING EVIDENCE
      4. 38.4. SUMMARY
    30. REFERENCES
    31. 39. Dynamic Factor Approaches to Equity Portfolio Management
      1. 39.1. METHODS OF ACTIVE MANAGEMENT
        1. 39.1.1. Security Selection
        2. 39.1.2. Examples of Factor Exposure
          1. 39.1.2.1. Style/Size
          2. 39.1.2.2. Regions, Countries, Industries, and Sectors
          3. 39.1.2.3. Macroeconomic Factors
          4. 39.1.2.4. Microeconomic Factors
      2. 39.2. MODELING
        1. 39.2.1. Fundamental Valuation Based Methods
        2. 39.2.2. Momentum-Based and Trend-Sensitive Methods
        3. 39.2.3. Combined Methods
        4. 39.2.4. Other Techniques
      3. 39.3. IMPLEMENTATION
        1. 39.3.1. Physical Securities
        2. 39.3.2. Trading in Aggregates
      4. 39.4. SUMMARY
    32. REFERENCES
    33. 40. Statistical Arbitrage
      1. 40.1. PAIRS TRADING
        1. 40.1.1. Correlation Trading
        2. 40.1.2. Examples of Pairs Trading
          1. 40.1.2.1. Constant Relative Price Process Model
          2. 40.1.2.2. Linear Regression–Based Model
          3. 40.1.2.3. Correlated Residuals Model
        3. 40.1.3. Cointegration and Error Correction Modeling
      2. 40.2. GENERAL MODELS
      3. 40.3. SUMMARY
    34. REFERENCES
    35. 41. The Use of Derivatives in Managing Equity Portfolios
      1. 41.1. LINEAR PAYOFFS: SWAPS
      2. 41.2. LINEAR PAYOFFS: FUTURES
        1. 41.2.1. Applications of Buying Futures
        2. 41.2.2. Applications of Selling Futures
        3. 41.2.3. Hedge Ratios Using Futures
      3. 41.3. NONLINEAR PAYOFFS: OPTIONS
        1. 41.3.1. Payoff Profiles for Options
        2. 41.3.2. Selling Call Options: Exchanging Appreciation for Income
        3. 41.3.3. Asymmetric Hedges: Protecting the Downside
          1. 41.3.3.1. Protective Put
          2. 41.3.3.2. Protective Put Spread
          3. 41.3.3.3. Collar (Range Forward or Fence)
        4. 41.3.4. Buying Call Options: Creating Market Exposure
        5. 41.3.5. Probability Distribution of Returns
        6. 41.3.6. Automatic Changes in Market Exposure
      4. 41.4. SUMMARY
    36. REFERENCES
    37. 42. A Valuation Framework for Selecting Option Strategies
      1. 42.1. The Problem With Black-Scholes
      2. 42.2. WHY OBSERVED PRICES MAY DIFFER FROM BLACK-SCHOLES
        1. 42.2.1. Perfectly Liquid Markets
        2. 42.2.2. Constant Interest Rates
        3. 42.2.3. Continuous Markets
        4. 42.2.4. Geometric Brownian Motion
        5. 42.2.5. Short-Selling Assumption
      3. 42.3. A Generalized Actuarial Model
        1. 42.3.1. Examples of Actuarial Valuation
      4. 42.4. Summary
    38. REFERENCES
  8. 3. Fixed Income Portfolio Management
    1. 43. Bond Portfolio Strategies for Outperforming a Benchmark
      1. 43.1. SELECTING THE BENCHMARK INDEX
        1. 43.1.1. Principle 1: Relevance to the Investor
        2. 43.1.2. Principle 2: Representative of the Market
        3. 43.1.3. Principle 3: Transparent Rules and Consistent Constituents
        4. 43.1.4. Principle 4: Investible and Replicable
        5. 43.1.5. Principle 5: High-Quality Data
        6. 43.1.6. Principle 6: Independence
      2. 43.2. CREATING A CUSTOM INDEX
        1. 43.2.1. Rules-Based Indices
          1. 43.2.1.1. Market Type
          2. 43.2.1.2. Inflation Index
          3. 43.2.1.3. Rating
          4. 43.2.1.4. Aggregate Face Value
          5. 43.2.1.5. Percentage of Index
        2. 43.2.2. Using Mean/Variance Analysis to Customize an Index
          1. 43.2.2.1. Setting Up the Problem
      3. 43.3. BEATING THE BENCHMARK INDEX
        1. 43.3.1. Choosing Scenarios for the Optimization
        2. 43.3.2. Choosing the Optimization Criterion
        3. 43.3.3. Defining the Constraints
          1. 43.3.3.1. Duration Bands
          2. 43.3.3.2. Partial Duration
          3. 43.3.3.3. Asset Allocation Weights
          4. 43.3.3.4. Loss Constraints
          5. 43.3.3.5. Issue Weights
        4. 43.3.4. Putting It All Together: The Optimal Portfolio
          1. 43.3.4.1. The Duration Decision
          2. 43.3.4.2. The Optimal Portfolio in a Multiasset Setting
      4. 43.4. SUMMARY
    2. REFERENCES
    3. 44. Fixed Income Portfolio Investing: The Art of Decision Making
      1. 44.1. THE BOND PORTFOLIO MANAGER
      2. 44.2. THE GLOBAL CHALLENGE
      3. 44.3. PORTFOLIO PARAMETERS
      4. 44.4. FORECAST CONFIDENCE AND RELATIVE RISK
      5. 44.5. REGULATORY CHANGES, DEMOGRAPHIC TRENDS, AND INSTITUTIONAL BIAS
      6. 44.6. INFORMATION IN THE MARKETS
      7. 44.7. DURATION AND YIELD CURVE
      8. 44.8. VOLATILITY
      9. 44.9. LIMITATIONS OF SOVEREIGN ONLY BOND PORTFOLIOS
      10. 44.10. INFLATION-LINKED BONDS
      11. 44.11. INTERNATIONAL CORPORATE BONDS
      12. 44.12. INTERNATIONAL INVESTING AND POLITICAL EXTERNALITIES
      13. 44.13. FOREIGN INVESTMENT SELECTION
      14. 44.14. CURRENCY SELECTION
      15. 44.15. THE EVOLUTION OF GLOBAL BOND INDICES
      16. 44.16. SUMMARY
    4. REFERENCES
    5. 45. Analysis and Evaluation of Corporate Bonds
      1. 45.1. QUANTITATIVERATING MODELS
        1. 45.1.1. Scoring Models
        2. 45.1.2. Discriminant Analysis
        3. 45.1.3. The Selection of Financial Ratios for the Rating Model
        4. 45.1.4. Model Formation
        5. 45.1.5. Forming the Discriminant Function
        6. 45.1.6. Testing the Discriminant Function
        7. 45.1.7. Analysis of a Discriminant Function on the Basis of a Case Study
      2. 45.2. RELATIVE VALUE ANALYSIS
      3. 45.3. SUMMARY
    6. REFERENCES
    7. 46. Analyzing and Interpreting the Yield Curve
      1. 46.1. SHAPES OBSERVED FOR THE YIELD CURVE
      2. 46.2. THE EXPECTATIONS HYPOTHESIS
      3. 46.3. LIQUIDITY PREFERENCE THEORY
      4. 46.4. MONEY SUBSTITUTE HYPOTHESIS
      5. 46.5. SEGMENTATION HYPOTHESIS
      6. 46.6. THE COMBINED THEORY
      7. 46.7. THE FLAT YIELD CURVE
      8. 46.8. FURTHER VIEWS ON THE YIELD CURVE
      9. 46.9. SUMMARY
    8. REFERENCES
    9. 47. Creating an Optimal Portfolio to Fund Pension Liabilities
      1. 47.1. CURRENT PENSION FUND STRUCTURE
        1. 47.1.1. Liabilities: The Same as a Short Exposure to Long-Duration Bonds
        2. 47.1.2. Assets: Dominated by Equity Risk
        3. 47.1.3. Funding Status: Lots of Volatility and Zero Positive Return
        4. 47.1.4. Why the Typical Plan's Assets Do Not Outperform Liabilities
        5. 47.1.5. Funding Ratio Drawdowns Happen at the Wrong Time
      2. 47.2. A BETTER APPROACH TO STRUCTURING A DEFINED BENEFIT PENSION PORTFOLIO
        1. 47.2.1. The Liability-Immunizing Portfolio (Matching the Return on Liabilities)
        2. 47.2.2. Adding a Liability-Immunizing Exposure
        3. 47.2.3. A More Optimally Structured Portfolio Means Smaller, Less Frequent Contributions
          1. 47.2.3.1. Note on Leverage and Timing
        4. 47.2.4. The Excess Return Portfolio (Exceeding the Return on Liabilities)
        5. 47.2.5. Diversifying Exposures in the Excess Return Portfolio
        6. 47.2.6. Case Study: An Underfunded Pension Plan
      3. 47.3. SUMMARY
    10. REFERENCES
    11. A. DETAILS FOR THE ILLUSTRATIONS
      1. A.1.
        1. A.1.1. Cash Requirements for Liability-Immunizing Portfolio
        2. A.1.2. Funding Status Drawdowns
        3. A.1.3. Funding Status and Contributions with Liability Growth
        4. A.1.4. Expected Returns, Volatility, Tracking Error, and Correlations Assumptions
        5. A.1.5. Return History
          1. A.1.5.1. Typical Pension Fund Asset Allocation Return Histories Used
    12. 48. Convertible Bond Arbitrage
      1. 48.1. CASH-FLOW ARBITRAGE
      2. 48.2. VOLATILITY TRADING
      3. 48.3. GAMMA TRADING
        1. 48.3.1. High-Convexity Convertibles
      4. 48.4. CREDIT ARBITRAGE
      5. 48.5. SKEWED ARBITRAGE
      6. 48.6. CARRY TRADE
      7. 48.7. REFINANCING PLAYS
      8. 48.8. LATE-STAGE RESTRUCTURING PLAYS
      9. 48.9. MULTISTRATEGY
      10. 48.10. RISK CONTROL IN CONVERTIBLE ARBITRAGE STRATEGIES
      11. 48.11. SUMMARY
    13. REFERENCES
    14. 49. Maturity, Capital Structure, and Credit Risk: Important Relationships for Portfolio Managers
      1. 49.1. FIRM VALUATION AND BOND PRICING
      2. 49.2. UPGRADING THE CAPITAL STRUCTURE: EFFECT OF SUBORDINATION ON BOND PRICING
      3. 49.3. BOND MATURITY, CREDIT RISK, AND HEDGE RATIOS
      4. 49.4. EXPANDING THE RANGE OF POSSIBLE OUTCOMES
      5. 49.5. RESPONSES TO SHOCKS
      6. 49.6. SUMMARY
    15. REFERENCES
    16. 50. A Unified Approach to Interest Rate Risk and Credit Risk of Cash and Derivative Instruments
      1. 50.1. CASH BONDS, NO CREDIT RISK
      2. 50.2. PURE INTEREST RATE DERIVATIVES
      3. 50.3. CASH BOND WITH CREDIT RISK
      4. 50.4. FLOATING-RATE NOTES
      5. 50.5. SIMPLE CREDIT DERIVATIVE
      6. 50.6. DEFAULT
      7. 50.7. CASH INSTRUMENTS
      8. 50.8. ASSET SWAPS
      9. 50.9. CREDIT DEFAULT SWAPS
      10. 50.10. BOND/DEFAULT SWAP COMBINATION
      11. 50.11. SUMMARY
    17. REFERENCES
    18. 51. Swaps for the Modern Investment Manager
      1. 51.1. TRADITIONAL INVESTMENT ALTERNATIVES
      2. 51.2. ENTER SWAPS
      3. 51.3. NEW COMBINATIONS
      4. 51.4. REAL VERSUS INFLATION RISK
      5. 51.5. INFLATION SWAPS
      6. 51.6. SUMMARY
    19. REFERENCES
    20. 52. Overview of ABS Portfolio Management
      1. 52.1. INVESTOR TYPES AND STRATEGIES
      2. 52.2. CONSTRAINTS AND GUIDELINES
      3. 52.3. IDENTIFYING ABS RISKS
        1. 52.3.1. Fundamentals
        2. 52.3.2. Technicals
      4. 52.4. MONITORING ABS PORTFOLIOS AND MEASURING PERFORMANCE
        1. 52.4.1. Measuring ABS Performance
      5. 52.5. SUMMARY
    21. REFERENCES
  9. 4. Alternative Investments
    1. 53. Integrating Alternative Investments into the Asset Allocation Process
      1. 53.1. MODERN PORTFOLIO THEORY AND ITS LEGACY
      2. 53.2. ASSUMPTIONS THAT UNDERLIE STANDARD ASSET ALLOCATION MODELS
      3. 53.3. THE CHALLENGE OF ALTERNATIVE INVESTMENTS
      4. 53.4. THE INVESTOR'S DILEMMA
      5. 53.5. TOWARD A NEW ASSET ALLOCATION PARADIGM: THE FOUR CLASSES OF RETURN
      6. 53.6. TOWARD A NEW ASSET ALLOCATION PARADIGM: COSTS ASSOCIATED WITH EACH RETURN CLASS
      7. 53.7. INVESTMENT CLASSIFICATION IN A MULTIDIMENSIONAL FRAMEWORK
      8. 53.8. MULTIDIMENSIONAL ASSET ALLOCATION
      9. 53.9. EXAMPLE OF MULTIDIMENSIONAL ASSET ALLOCATION
      10. 53.10. IMPLEMENTING THE NEW ASSET ALLOCATION PARADIGM
      11. 53.11. SUMMARY
      12. 53.12. ACKNOWLEDGMENTS
    2. REFERENCES
    3. 54. Some Considerations in the Use of Currencies
      1. 54.1. BACKGROUND
      2. 54.2. THE MARKET FOR FOREIGN EXCHANGE
      3. 54.3. SPOT MARKET
      4. 54.4. THE PURCHASE AND SALE OF FOREIGN EXCHANGE
      5. 54.5. TRADITIONAL APPLICATIONS
        1. 54.5.1. Short/Long Currencies Part of Money Market Hedge
        2. 54.5.2. Short-Term Currency Speculation with Leverage and Interest Rate Calculations
          1. 54.5.2.1. A Practical Algorithm for Computing Net Currency and Interest Changes
          2. 54.5.2.2. The Case for Currency Programs: Currencies as an Asset Class
      6. 54.6. SUMMARY
    4. REFERENCES
  10. 5. Corporate Finance
    1. 55. Introduction to Financial Management and Analysis
      1. 55.1. FINANCIAL ANALYSIS
      2. 55.2. FORMS OF BUSINESS ENTERPRISE
        1. 55.2.1. Sole Proprietorships
        2. 55.2.2. Partnerships
        3. 55.2.3. Corporations
        4. 55.2.4. Other Forms of Business
        5. 55.2.5. Prevalence
      3. 55.3. THE OBJECTIVE OF FINANCIAL MANAGEMENT
        1. 55.3.1. The Measure of Owner's Economic Well-Being
        2. 55.3.2. Economic Profit versus Accounting Profit: Share Price versus Earnings per Share
        3. 55.3.3. Share Prices and Efficient Markets
        4. 55.3.4. Financial Management and the Maximization of Owners' Wealth
      4. 55.4. THE AGENCY RELATIONSHIP
        1. 55.4.1. Problems with the Agency Relationship
        2. 55.4.2. Costs of the Agency Relationship
        3. 55.4.3. Motivating Managers: Executive Compensation
        4. 55.4.4. Shareholder Wealth Maximization and Accounting "Irregularities"
        5. 55.4.5. Shareholder Wealth Maximization and Social Responsibility
      5. 55.5. SUMMARY
    2. REFERENCES
    3. 56. Introduction to International Corporate Financial Management
      1. 56.1. MULTINATIONAL FIRMS
      2. 56.2. FOREIGN CURRENCY
        1. 56.2.1. Exchange Rates
        2. 56.2.2. Currency Risk
        3. 56.2.3. Purchasing Power Parity
      3. 56.3. TAX CONSIDERATIONS
        1. 56.3.1. Establishing a Business Entity
        2. 56.3.2. Corporate Income Tax Rates
        3. 56.3.3. Determining Taxable Income
          1. 56.3.3.1. Interest Expense
          2. 56.3.3.2. Intercompany Transactions and Transfer Prices
      4. 56.4. FINANCING OUTSIDE THE DOMESTIC MARKET
        1. 56.4.1. Motivation for Raising Funds Outside of the Domestic Market
        2. 56.4.2. Implications of Global Market Integration for Funding Costs
        3. 56.4.3. Cross-Listing Stock
          1. 56.4.3.1. International Depositary Receipts
          2. 56.4.3.2. Euroequity Issues
        4. 56.4.4. Eurobond Market
      5. 56.5. FINANCIAL ANALYSIS ISSUES
      6. 56.6. CAPITAL BUDGETING
      7. 56.7. CAPITAL STRUCTURE
      8. 56.8. WORKING CAPITAL MANAGEMENT
      9. 56.9. HEDGING CURRENCY RISK
        1. 56.9.1. Currency Forward Contracts
        2. 56.9.2. Currency Futures Contracts
        3. 56.9.3. Currency Swaps
        4. 56.9.4. Currency Option Contracts
      10. 56.10. SUMMARY
    4. REFERENCES
    5. 57. Corporate Strategy and Financial Planning
      1. 57.1. STRATEGY AND VALUE
        1. 57.1.1. Comparative and Competitive Advantages
        2. 57.1.2. Strategy and Adding Value
      2. 57.2. FINANCIAL PLANNING AND BUDGETING
      3. 57.3. IMPORTANCE OF FINANCIAL PLANNING
      4. 57.4. BUDGETING PROCESS
      5. 57.5. SALES FORECASTING
        1. 57.5.1. Forecasting with Regression Analysis
        2. 57.5.2. Market Surveys
        3. 57.5.3. Management Forecasts
      6. 57.6. SEASONAL CONSIDERATIONS
      7. 57.7. BUDGETING
        1. 57.7.1. Cash Budget
      8. 57.8. PRO FORMA FINANCIAL STATEMENTS
        1. 57.8.1. Analysis of Accounts
        2. 57.8.2. Percent-of-Sales Method
      9. 57.9. LONG-TERM FINANCIAL PLANNING
      10. 57.10. FINANCIAL MODELING
      11. 57.11. PERFORMANCE EVALUATION
        1. 57.11.1. Economic Value Added
          1. 57.11.1.1. Economic Profit/Economic Value Added
          2. 57.11.1.2. Market Value Added
        2. 57.11.2. Balanced Scorecard
          1. 57.11.2.1. The Process
          2. 57.11.2.2. The Measures
          3. 57.11.2.3. How Do Companies Use the Balanced Scorecard?
          4. 57.11.2.4. Scorecard for the Balanced Scorecard
      12. 57.12. STRATEGY AND VALUE CREATION
        1. 57.12.1. Sources of Value Creation
      13. 57.13. SUMMARY
    6. REFERENCES
    7. 58. Corporate Governance
      1. 58.1. AGENCY THEORY AND PROBLEMS
        1. 58.1.1. Failure of Internal Corporate Control Systems
          1. 58.1.1.1. Board Agenda
          2. 58.1.1.2. Board Composition
          3. 58.1.1.3. Equity Alignment
          4. 58.1.1.4. Board Size
          5. 58.1.1.5. Joint CEO/Chairman Role
      2. 58.2. CORPORATE GOVERNANCE PROGRAMS
        1. 58.2.1. Definition of Corporate Governance
        2. 58.2.2. Standards and Codes of Best Practice for Corporate Governance
        3. 58.2.3. Shareowner versus Shareholder
        4. 58.2.4. SEC Rule 14a-8
      3. 58.3. CORPORATE GOVERNANCE RATINGS
      4. 58.4. SUMMARY
    8. REFERENCES
    9. 59. Measuring the Performance of Corporate Managers
      1. 59.1. PERFORMANCE MEASUREMENT AND MANAGERIAL COMPENSATION
        1. 59.1.1. Performance Measurement
        2. 59.1.2. Accounting Measures
          1. 59.1.2.1. Return on Investment (ROI)
        3. 59.1.3. The Economic Income Method
        4. 59.1.4. Market Measures
        5. 59.1.5. Nonaccounting Quantitative Measures
        6. 59.1.6. Qualitative Measures
      2. 59.2. MANAGERIAL COMPENSATION
        1. 59.2.1. Agency Theory Applied to Corporate Management and Performance Measurement
        2. 59.2.2. Noncontrollable Factors
        3. 59.2.3. A Nonzero Net Present Value
        4. 59.2.4. Incentive Consideration
        5. 59.2.5. Deferred Benefits
        6. 59.2.6. Cash Flow Return on Investment
      3. 59.3. PLANNING IMPLICATIONS
      4. 59.4. SUMMARY
    10. REFERENCES
    11. 60. Capital Structure Decisions in Corporate Finance
      1. 60.1. DEBT VERSUS EQUITY
      2. 60.2. THE CONCEPT OF LEVERAGE
        1. 60.2.1. Leverage and Operating Risk
        2. 60.2.2. Leverage and Financial Risk
      3. 60.3. CAPITAL STRUCTURE AND FINANCIAL LEVERAGE
      4. 60.4. FINANCIAL LEVERAGE AND RISK
        1. 60.4.1. The Leverage Effect
        2. 60.4.2. Leverage and Financial Flexibility
        3. 60.4.3. Governance Value of Debt Financing
      5. 60.5. CAPITAL STRUCTURE AND TAXES
        1. 60.5.1. Interest Deductibility and Capital Structure
        2. 60.5.2. Interest Tax Shield
        3. 60.5.3. Unused Tax Shields
      6. 60.6. CAPITAL STRUCTURE AND FINANCIAL DISTRESS
        1. 60.6.1. Costs of Financial Distress
        2. 60.6.2. The Role of Limited Liability
        3. 60.6.3. Bankruptcy and Bankruptcy Costs
        4. 60.6.4. Financial Distress and Capital Structure
      7. 60.7. THE COST OF CAPITAL
      8. 60.8. THE AGENCY RELATIONSHIP
        1. 60.8.1. Problems with the Agency Relationship
          1. 60.8.1.1. Costs of the Agency Relationship
        2. 60.8.2. The Agency Relationship and Capital Structure
      9. 60.9. OPTIMAL CAPITAL STRUCTURE: THEORY AND PRACTICE
        1. 60.9.1. Capital Structures among Different Industries
        2. 60.9.2. Capital Structures within Industries
        3. 60.9.3. Trade-off Theory and Observed Capital Structures
        4. 60.9.4. Other Possible Explanations
      10. 60.10. A CAPITAL STRUCTURE PRESCRIPTION
      11. 60.11. SUMMARY
    12. REFERENCES
    13. 61. Capital Structure: Lessons from Modigliani and Miller
      1. 61.1. M&M IRRELEVANCE PROPOSITION
      2. 61.2. M&M WITH TAX DEDUCTIBILITY OF INTEREST PAID ON DEBT
      3. 61.3. CAPITAL STRUCTURE THEORY AND COSTS TO FINANCIAL DISTRESS
      4. 61.4. THE TRADITIONAL TRADE-OFF MODEL AND CURRENT CAPITAL STRUCTURE THEORY AND PRACTICE
      5. 61.5. SUMMARY
    14. REFERENCES
    15. 62. Bondholder Value versus Shareholder Value
      1. 62.1. SHAREHOLDER AND BONDHOLDER—DEFINITION AND INTERESTS
        1. 62.1.1. Shareholder Value
        2. 62.1.2. Bondholder Value
      2. 62.2. CONFLICTS OF INTEREST BETWEEN SHAREHOLDERS AND BONDHOLDERS
        1. 62.2.1. Capital Structure
        2. 62.2.2. Stock Buybacks
        3. 62.2.3. Corporate Strategy and Business Policy
      3. 62.3. INSTRUMENTS OF SHAREHOLDER VALUE TO ENHANCE BONDHOLDER VALUE
        1. 62.3.1. Investor Relations Not Only for Shareholders
        2. 62.3.2. Risk Management
        3. 62.3.3. Balanced Scorecard
      4. 62.4. SUMMARY
    16. REFERENCES
    17. 63. Recapitalization of Troubled Companies
      1. 63.1. FRAMEWORK FOR RECAPITALIZATIONS
      2. 63.2. OUT-OF-COURT WORKOUTS AND BANKRUPTCY
        1. 63.2.1. Out-of-Court Workouts
        2. 63.2.2. In-Court Reorganization
        3. 63.2.3. Prepackaged Bankruptcy
        4. 63.2.4. Liquidation
      3. 63.3. ACCOUNTING TREATMENT
        1. 63.3.1. Troubled Debt Restructuring
        2. 63.3.2. Asset Impairment
        3. 63.3.3. Fresh-Start Accounting
        4. 63.3.4. TAX CONSIDERATIONS
      4. 63.4. VALUING RECAPITALIZATION SECURITIES
        1. 63.4.1. The Southland Leveraged Buyout
        2. 63.4.2. The Recapitalization Plans
        3. 63.4.3. Valuing the New Debt Securities
        4. 63.4.4. Valuing Equity
        5. 63.4.5. Recovery
      5. 63.5. VALUING RECAPITALIZATION RIGHTS AND OPTIONS
      6. 63.6. SUMMARY
    18. REFERENCES
    19. 64. Dividend and Dividend Policies
      1. 64.1. DIVIDENDS
        1. 64.1.1. Dividend Reinvestment Plans
          1. 64.1.1.1. Stock Distributions
      2. 64.2. DIVIDEND POLICY
        1. 64.2.1. The Dividend Irrelevance Theory
        2. 64.2.2. The "Bird in the Hand" Theory
        3. 64.2.3. The Tax-Preference Explanation
        4. 64.2.4. The Signaling Explanation
        5. 64.2.5. The Agency Explanation
        6. 64.2.6. Summing Up: To Pay Dividends or Not
      3. 64.3. STOCK REPURCHASES
      4. 64.4. SUMMARY
    20. REFERENCES
    21. 65. The Investment Problem and Capital Budgeting
      1. 65.1. INVESTMENT DECISIONS AND OWNERS' WEALTH MAXIMIZATION
      2. 65.2. CAPITAL BUDGETING PROCESS
        1. 65.2.1. Stages in the Capital Budgeting Process
          1. 65.2.1.1. Stage 1: Investment Screening and Selection
          2. 65.2.1.2. Stage 2: Capital Budget Proposal
          3. 65.2.1.3. Stage 3: Budgeting Approval and Authorization
          4. 65.2.1.4. Stage 4: Project Tracking
          5. 65.2.1.5. Stage 5: Postcompletion Audit
      3. 65.3. CLASSIFYING INVESTMENT PROJECTS
        1. 65.3.1. Classification According to Their Economic Life
        2. 65.3.2. Classification According to Their Risk
        3. 65.3.3. Classification According to Their Dependence on Other Projects
      4. 65.4. SUMMARY
    22. REFERENCES
    23. 66. Estimating Cash Flows of Capital Budgeting Projects
      1. 66.1. INCREMENTAL CASH FLOWS
      2. 66.2. INVESTMENT CASH FLOWS
        1. 66.2.1. Asset Acquisition
        2. 66.2.2. Asset Disposition
      3. 66.3. EXPECTED CASH FLOWS FROM THE DISPOSITION OF AN ASSET
        1. 66.3.1. Case 1: Sell the Asset for More than Its Tax Basis, but Less than Its Original Cost
        2. 66.3.2. Case 2: Sell the Asset for More than the Original Cost
        3. 66.3.3. Case 3: Sell the Asset for Less than Its Tax Basis
          1. 66.3.3.1. Disposition of New Investment
          2. 66.3.3.2. Disposition of Existing Asset(s)
      4. 66.4. OPERATING CASH FLOWS
        1. 66.4.1. Change in Revenues
        2. 66.4.2. Change in Expenses
        3. 66.4.3. Change in Taxes
        4. 66.4.4. Change in Working Capital
        5. 66.4.5. Putting it All Together
      5. 66.5. NET CASH FLOWS
      6. 66.6. SIMPLIFICATIONS
      7. 66.7. SUMMARY
    24. REFERENCES
    25. 67. Capital Budgeting Techniques
      1. 67.1. EVALUATION TECHNIQUES
        1. 67.1.1. The Cost of Capital, the Required Rate of Return, and the Discount Rate
      2. 67.2. NET PRESENT VALUE
        1. 67.2.1. Calculating the Net Present Value
        2. 67.2.2. The Investment Profile
          1. 67.2.2.1. Solving for the Crossover Rate
      3. 67.3. PROFITABILITY INDEX
      4. 67.4. INTERNAL RATE OF RETURN
        1. 67.4.1. The IRR and Mutually Exclusive Projects
        2. 67.4.2. The IRR and Capital Rationing
        3. 67.4.3. Multiple Internal Rates of Return
      5. 67.5. MODIFIED INTERNAL RATE OF RETURN
        1. 67.5.1. Calculating the Modified Internal Rate of Return
      6. 67.6. PAYBACK PERIOD
      7. 67.7. DISCOUNTED PAYBACK PERIOD
        1. 67.7.1. Calculating the Discounted Payback Period
      8. 67.8. ISSUES IN CAPITAL BUDGETING
        1. 67.8.1. Scale Differences
          1. 67.8.1.1. Mutually Exclusive Projects
          2. 67.8.1.2. Capital Rationing
        2. 67.8.2. Unequal Lives
      9. 67.9. COMPARING TECHNIQUES
      10. 67.10. CAPITAL BUDGETING TECHNIQUES IN PRACTICE
      11. 67.11. CAPITAL BUDGETING AND THE JUSTIFICATION OF NEW TECHNOLOGY
      12. 67.12. SUMMARY
    26. REFERENCES
    27. 68. Capital Budgeting and Risk
      1. 68.1. PROJECT RISK
        1. 68.1.1. Different Types of Project Risk
      2. 68.2. MEASUREMENT OF PROJECT RISK
        1. 68.2.1. Range
          1. 68.2.1.1. Standard Deviation
          2. 68.2.1.2. Coefficient of Variation
        2. 68.2.2. Tools That Can Be Used to Evaluate Total Risk
      3. 68.3. MEASURING A PROJECT'S MARKET RISK
        1. 68.3.1. Market Risk and Financial Leverage
          1. 68.3.1.1. Using a Pure Play
        2. 68.3.2. Adjusted Present Value
      4. 68.4. INCORPORATING RISK IN THE CAPITAL BUDGETING DECISION
        1. 68.4.1. Risk-Adjusted Rate
          1. 68.4.1.1. Project's Cost of Capital Based on the CAPM Method
          2. 68.4.1.2. Adjusting the Company's Cost of Capital
      5. 68.5. REAL OPTIONS
      6. 68.6. CERTAINTY EQUIVALENTS
      7. 68.7. ASSESSMENT OF PROJECT RISK IN PRACTICE
      8. 68.8. SUMMARY
    28. REFERENCES
    29. 69. Real Options
      1. 69.1. THE DIFFERENCE BETWEEN REAL OPTIONS AND FINANCIAL OPTIONS
      2. 69.2. USING OPTION PRICING TO VALUE BUSINESS OPPORTUNITIES
      3. 69.3. CHOICE AND SPECIFICATION OF AN OPTION-PRICING MODEL
        1. 69.3.1. The Binomial Model
        2. 69.3.2. A Simplified Example
      4. 69.4. USEFULNESS OF THE REAL-OPTIONS APPROACH
      5. 69.5. ILLUSTRATION: THE OIL FIELD PROJECT
        1. 69.5.1. The Project's Real Options
        2. 69.5.2. Project Call Options
        3. 69.5.3. Sources of Uncertainty
        4. 69.5.4. Evaluating the Project
        5. 69.5.5. Modeling Future Oil Prices
        6. 69.5.6. Reserve Profile and the Quantity of Reserves
        7. 69.5.7. Present Value of the Field Ignoring Abandonment
        8. 69.5.8. Taking into Account the Option to Abandon Early
        9. 69.5.9. Value of the Option to Develop the Field
        10. 69.5.10. The Deferral Option
        11. 69.5.11. Value of the Option to Drill Appraisal Wells
        12. 69.5.12. Value of the Option to Drill Exploration Wells
        13. 69.5.13. Net Present Value of the Project
          1. 69.5.13.1. Traditional DCF Analysis
          2. 69.5.13.2. Sensitivity of Option Value to Oil Price Volatility and to Reserve Dispersion
      6. 69.6. SUMMARY
    30. REFERENCES
    31. 70. Real Options and Modern Capital Investment Decisions
      1. 70.1. AN ILLUSTRATION
      2. 70.2. IS NPV WRONG?
      3. 70.3. WHY REAL OPTIONS ANALYSIS IS IMPORTANT
      4. 70.4. TIMING OPTIONS
        1. 70.4.1. Optimal Timing Under Negligible Uncertainty
        2. 70.4.2. Timing and the Profitability Index
        3. 70.4.3. Uncertain Growth in Value
        4. 70.4.4. Value of the Timing Option
      5. 70.5. EXPANSION OPTIONS
        1. 70.5.1. Research and Development
        2. 70.5.2. More Optionality
        3. 70.5.3. An Expansion Question
        4. 70.5.4. Volatility and Other Sensitive Parameters
      6. 70.6. ABANDONMENT OPTIONS
      7. 70.7. A NOTE OF CAUTION
      8. 70.8. SUMMARY
    32. REFERENCES
    33. 71. Hurdle Rates for Overseas Projects
      1. 71.1. PROJECT-SPECIFIC OPERATING BETAS AND THE GLOBAL CAPITAL ASSET PRICING MODEL
        1. 71.1.1. Operating Beta Approach
        2. 71.1.2. The Global CAPM
      2. 71.2. SIMPLE APPROXIMATIONS OF A FOREIGN PROJECT'S OPERATING BETA
        1. 71.2.1. Accounting Beta Method
        2. 71.2.2. Country Beta Method
      3. 71.3. EMERGING MARKET PROJECTS
        1. 71.3.1. Country Risk for Emerging Markets
        2. 71.3.2. Hurdle Rates for Emerging Market Projects
      4. 71.4. CONSISTENT HURDLE RATES ACROSS CURRENCIES
        1. 71.4.1. Conversion of Hurdle Rates across Currencies
        2. 71.4.2. Risk and Return in Non-U.S. Dollar Currencies
      5. 71.5. FOREIGN PURE PLAY PROXY METHOD
        1. 71.5.1. Unlevering Equity Betas
        2. 71.5.2. Foreign Pure Play Proxy
        3. 71.5.3. FX Exposure and Operating Beta
      6. 71.6. SUMMARY
      7. 71.7. APPENDIX
        1. 71.7.1. Derivation of Equation (71.3)
        2. 71.7.2. Derivation of Equation (71.5)
        3. 71.7.3. Derivation of Equation (71.6)
    34. REFERENCES
    35. 72. Structured Finance
      1. 72.1. OTHER DEFINITIONS OF STRUCTURED FINANCE
      2. 72.2. BORDERLINE CASES AND BOUNDARIES
      3. 72.3. BASIC CONCEPTUAL DEFINITIONS
      4. 72.4. INSTRUMENTS AND TECHNIQUES
      5. 72.5. WHEN OR WHERE STRUCTURED FINANCE IS USED
      6. 72.6. BENEFITS OF STRUCTURED FINANCE
      7. 72.7. SECURITIZATION
      8. 72.8. ARGUMENTS FOR BROADER DEFINITIONS
      9. 72.9. SUMMARY
    36. REFERENCES
    37. 73. Introduction to Securitization
      1. 73.1. WHAT IS A SECURITIZATION?
        1. 73.1.1. Illustration of a Securitization
      2. 73.2. APPEAL OF SECURITIZATION
        1. 73.2.1. Diversification and Reduced Cost of Funding
        2. 73.2.2. Generation of Servicing Fee Income
        3. 73.2.3. Earnings Acceleration and Management
        4. 73.2.4. Management of Interest Rate Volatility
        5. 73.2.5. Management of Regulatory Capital
        6. 73.2.6. Off-Balance-Sheet Financing
        7. 73.2.7. Less Public Disclosure than Competing Methods of Financing
      3. 73.3. INVESTMENT ATTRIBUTES OF ABSs
      4. 73.4. DEVELOPMENT OF ASSET SECURITIZATION
      5. 73.5. WHAT IT TAKES TO SECURITIZE
      6. 73.6. CREDIT ENHANCEMENT MECHANISMS
      7. 73.7. RATING AGENCY CRITERIA FOR ABSs
      8. 73.8. MACROECONOMIC BENEFITS OF SECURITIZATION
      9. 73.9. ARE SECURITIZATIONS EXEMPT FROM CORPORATE RISK?
      10. 73.10. SUMMARY
    38. REFERENCES
    39. 74. Issuer Prospective in Structuring Asset-Backed Securities Transactions
      1. 74.1. COMPARISON BETWEEN A CORPORATION AND A SECURITIZATION STRUCTURE
      2. 74.2. IDENTIFICATION OF THE ASSET POOL
      3. 74.3. SELECTION OF THE ASSETS
      4. 74.4. IDENTIFICATION OF RISKS
      5. 74.5. DETERMINATION OF THE SOURCES AND SIZE OF CREDIT SUPPORT
      6. 74.6. DETERMINATION OF THE BOND CLASSES
      7. 74.7. TIME TRANCHING OF BOND CLASSES
      8. 74.8. SELECTING THE PAY-DOWN STRUCTURE FOR THE BOND CLASSES
      9. 74.9. DETERMINATION OF THE AMOUNT AND SOURCES FOR LIQUIDITY SUPPORT
      10. 74.10. DETERMINING IF ANY PREPAYMENT PROTECTION IS NEEDED
      11. 74.11. INCLUSION OF STRUCTURAL PROTECTION TRIGGERS
      12. 74.12. SUMMARY
    40. REFERENCES
    41. 75. Structuring Efficient Asset-Backed Transactions
      1. 75.1. INVESTMENT BANKER'S GOAL AND ISSUER'S OBJECTIVES
      2. 75.2. COMPARISON TO OTHER FINANCING VEHICLES
        1. 75.2.1. Whole-Loan Sales versus Securitizations
        2. 75.2.2. Secured Financing versus Securitizations
        3. 75.2.3. Defeased Debt versus Securitization
      3. 75.3. BANKRUPTCY FIREWALLS AND THE ISSUANCE VEHICLE
      4. 75.4. UNDERLYING CONSIDERATIONS OF FINANCING VERSUS SALE FOR GAAP AND TAX
        1. 75.4.1. Tax Debt and Equity
      5. 75.5. EFFICIENT ALLOCATION OF RISK—CREDIT RISK
        1. 75.5.1. External Enhancement
        2. 75.5.2. Internal Enhancement
        3. 75.5.3. Combining External and Internal Enhancement
        4. 75.5.4. Credit Enhancement Decisions
        5. 75.5.5. Determining Credit Enhancement Levels
      6. 75.6. TARGETING SPECIFIC INVESTORS
        1. 75.6.1. Time Tranching
        2. 75.6.2. Coupon and Volatility Tranching
      7. 75.7. EMBEDDED OPTIONS AND FLOATING-RATE MISMATCH
        1. 75.7.1. Public versus Private Execution
        2. 75.7.2. Tax Efficiency
        3. 75.7.3. Deal Size
        4. 75.7.4. Prefunding Accounts
        5. 75.7.5. Conduits
      8. 75.8. SUMMARY
    42. REFERENCES
    43. 76. Funding through the Use of Trade Receivable Securitizations
      1. 76.1. REASONS TO SECURITIZE RECEIVABLES
      2. 76.2. RECEIVABLES SECURITIZATION
      3. 76.3. UNDERWRITING
      4. 76.4. CREDIT INSURANCE
      5. 76.5. SERVICING
      6. 76.6. FUNDING AVAILABILITY
      7. 76.7. COLLATERALIZATION TEST
      8. 76.8. NET RECEIVABLES POOL BALANCE
      9. 76.9. STANDARD RESERVES
        1. 76.9.1. Loss Reserve
        2. 76.9.2. Trade Credit Insurance
        3. 76.9.3. Dilution Reserve
        4. 76.9.4. Dynamic and Static Reserves
        5. 76.9.5. Yield and Fee Reserves
      10. 76.10. FUNDING MECHANICS
      11. 76.11. MONTHLY SETTLEMENTS
      12. 76.12. SUMMARY
    44. REFERENCES
    45. 77. Operational Issues in Securitization
      1. 77.1. THE SERVICING FUNCTION
      2. 77.2. TYPES OF SERVICERS
      3. 77.3. SERVICER STRENGTHS
        1. 77.3.1. Staff Strengths
        2. 77.3.2. Organizational Structure
        3. 77.3.3. Training
        4. 77.3.4. Staff Turnover
        5. 77.3.5. Systems
        6. 77.3.6. Internal Controls
        7. 77.3.7. Loan/Asset Administration
      4. 77.4. SERVICER QUALITIES
        1. 77.4.1. Consumer Finance
        2. 77.4.2. Commercial Finance Servicers
        3. 77.4.3. Franchise Loan Servicers
        4. 77.4.4. Commercial Mortgage-Backed Finance Servicers
          1. 77.4.4.1. Primary Servicers
          2. 77.4.4.2. Master Servicers
          3. 77.4.4.3. Special Servicers
        5. 77.4.5. Residential Mortgage Servicers
          1. 77.4.5.1. Primary Servicers
          2. 77.4.5.2. Subprime Services
          3. 77.4.5.3. Special Servicers
          4. 77.4.5.4. Master Servicers
      5. 77.5. SERVICING TRANSITION
      6. 77.6. BACKUP SERVICER
      7. 77.7. REPORTING BY THE SERVICER
      8. 77.8. ROLE OF TRUSTEES IN OPERATION OF THE TRANSACTION
      9. 77.9. FRAUD RISK
      10. 77.10. SUMMARY
    46. REFERENCES
    47. 78. Project Financing
      1. 78.1. WHAT IS PROJECT FINANCING?
      2. 78.2. REASONS FOR JOINTLY OWNED OR SPONSORED PROJECTS
      3. 78.3. CREDIT EXPOSURES IN A PROJECT FINANCING
        1. 78.3.1. Risk Phases
          1. 78.3.1.1. Engineering and Construction Phase
          2. 78.3.1.2. Start-up Phase
          3. 78.3.1.3. Operations According to Specification
        2. 78.3.2. Different Lenders for Different Risk Periods
      4. 78.4. KEY ELEMENTS OF A SUCCESSFUL PROJECT FINANCING
      5. 78.5. CAUSES FOR PROJECT FAILURES
        1. 78.5.1. Market Risk
          1. 78.5.1.1. PYCSA, Panama
          2. 78.5.1.2. SCL Terminal Aéreo Santiago
        2. 78.5.2. Market Risk, High Leverage, High Purchase Price
          1. 78.5.2.1. Drax, UK
        3. 78.5.3. Market Risk, Political Risk
          1. 78.5.3.1. Dabhol, India
        4. 78.5.4. Market Risk, Counterparty Risk, Currency Risk, Political Risk
          1. 78.5.4.1. Paiton Energy, Indonesia
        5. 78.5.5. Counterparty Risk, Political Risk
          1. 78.5.5.1. Meizou Wan, China
        6. 78.5.6. Market Risk, Currency Risk, Political Risk, High Purchase Price
          1. 78.5.6.1. BCP, Brazil
        7. 78.5.7. Market Risk, High Leverage
          1. 78.5.7.1. FLAG
        8. 78.5.8. Market Risk, Operating Risk
          1. 78.5.8.1. Andacollo Gold Mine, Chile
        9. 78.5.9. Counterparty Risk, Political Risk
          1. 78.5.9.1. TermoEmcali, Colombia
        10. 78.5.10. Counterparty Risk, Construction Risk, Political Risk
          1. 78.5.10.1. Casecnan Water and Energy, Philippines
      6. 78.6. CREDIT IMPACT OBJECTIVE
        1. 78.6.1. Sources of Capital
        2. 78.6.2. Project Finance Credit Ratings
        3. 78.6.3. Institutional Investors' Needs
      7. 78.7. ACCOUNTING CONSIDERATIONS
      8. 78.8. MEETING INTERNAL RETURN OBJECTIVES
      9. 78.9. OTHER BENEFITS OF A PROJECT FINANCING
      10. 78.10. TAX CONSIDERATIONS
      11. 78.11. DISINCENTIVES TO PROJECT FINANCING
      12. 78.12. EFFECT OF ENRON DEBACLE ON TRADITIONAL PROJECT FINANCE
        1. 78.12.1. Background
        2. 78.12.2. Effect on Traditional Project Finance
        3. 78.12.3. Structured Project Finance
        4. 78.12.4. Special Purpose Entities
        5. 78.12.5. Sources of Free Cash Flow
        6. 78.12.6. Security Interests
        7. 78.12.7. How Companies Have Responded
        8. 78.12.8. Increased Transparency and Disclosure
        9. 78.12.9. Regulatory Issues
        10. 78.12.10. Other Lessons Learned
      13. 78.13. RECENT TRENDS
      14. 78.14. SUMMARY
    48. REFERENCES
    49. 79. The Fundamentals of Equipment Leasing
      1. 79.1. HOW LEASING WORKS
      2. 79.2. TYPES OF EQUIPMENT LEASES
        1. 79.2.1. Non-Tax-Oriented Leases
        2. 79.2.2. Tax-Oriented True Leases
          1. 79.2.2.1. Single-Investor Leases versus Leveraged Leases
      3. 79.3. FULL PAYOUT LEASES VERSUS OPERATING LEASES
      4. 79.4. REASONS FOR LEASING
        1. 79.4.1. Cost
        2. 79.4.2. Conservation of Working Capital
        3. 79.4.3. Preservation of Credit Capacity by Avoiding Capitalization
        4. 79.4.4. Risk of Obsolescence and Disposal of Equipment
        5. 79.4.5. Restrictions on Management
        6. 79.4.6. Impact on Cash Flow and Book Earnings
      5. 79.5. TYPES OF LESSORS
      6. 79.6. LEASE BROKERS AND FINANCIAL ADVISERS
      7. 79.7. OVERVIEW OF LEASE DOCUMENTATION FOR NONLEVERAGED LEASES
      8. 79.8. LEASE PROGRAMS
      9. 79.9. FINANCIAL REPORTING OF LEASE TRANSACTIONS BY LESSEES
        1. 79.9.1. Classification of Leases
        2. 79.9.2. Accounting for Operating Leases
        3. 79.9.3. Accounting for Capital Leases
      10. 79.10. FEDERAL INCOME TAX REQUIREMENTS FOR TRUE LEASE TRANSACTIONS
      11. 79.11. SUMMARY
    50. REFERENCES
    51. 80. Leveraged Leasing
      1. 80.1. PARTIES TO A LEVERAGED LEASE
        1. 80.1.1. Lessee
        2. 80.1.2. Equity Participants
        3. 80.1.3. Loan Participants or Lenders
        4. 80.1.4. Owner Trustee
        5. 80.1.5. Indenture Trustee
        6. 80.1.6. Manufacturer or Contractor
        7. 80.1.7. Packager or Broker
        8. 80.1.8. Guarantor
      2. 80.2. STRUCTURE OF A LEVERAGED LEASE
      3. 80.3. CLOSING THE TRANSACTION
        1. 80.3.1. Participation Agreement
        2. 80.3.2. Other Key Documents
        3. 80.3.3. Indemnities by the Lessee
      4. 80.4. CASH FLOWS DURING THE LEASE
      5. 80.5. DEBT FOR LEVERAGED LEASES
      6. 80.6. FACILITY LEASES
      7. 80.7. CONSTRUCTION FINANCING
      8. 80.8. CREDIT EXPOSURE OF EQUITY PARTICIPANTS
      9. 80.9. TAX INDEMNIFICATION FOR FUTURE CHANGES IN TAX LAW
      10. 80.10. NEED FOR A FINANCIAL ADVISER
      11. 80.11. THE STEPS IN STRUCTURING, NEGOTIATING, AND CLOSING A LEVERAGED LEASE
      12. 80.12. SUMMARY
    52. REFERENCES
    53. 81. Lease versus Borrow-to-Buy Analysis
      1. 81.1. STEPS IN THE LEASE VERSUS BORROW-TO-BUY DECISION
      2. 81.2. CAPITAL BUDGETING USING THE NET PRESENT VALUE TECHNIQUE
        1. 81.2.1. How to Compute the Net Present Value
        2. 81.2.2. Decision Rules Using the Net Present Value Technique
        3. 81.2.3. Why the Net Present Value Technique?
      3. 81.3. VALUING A LEASE
        1. 81.3.1. Direct Cash Flow from Leasing
        2. 81.3.2. Valuing the Direct Cash Flow from Leasing
        3. 81.3.3. Concept of an Equivalent Loan
        4. 81.3.4. Comparison of Alternative Leases
      4. 81.4. ANOTHER APPROACH TO LEASE VALUATION
      5. 81.5. UNCERTAINTY AND THE LEASE VALUATION MODEL
        1. 81.5.1. Alternative Discount Rates and the Uncertainty of Cash Flows
        2. 81.5.2. Residual Value and the Lease Term
        3. 81.5.3. Debt Displacement and the Lease Valuation Model
        4. 81.5.4. Sensitivity Analysis
      6. 81.6. GENERALIZATION OF THE LEASE VALUATION MODEL
        1. 81.6.1. Modification of the Model When Tax Shield Cannot Be Carried Forward
      7. 81.7. SUMMARY
    54. REFERENCES
    55. 82. Basic Treasury Management Concepts
      1. 82.1. OVERVIEW OF TREASURY MANAGEMENT
        1. 82.1.1. Treasury Management Functions
        2. 82.1.2. The Operating Cycle and the Cash-Flow Timeline
        3. 82.1.3. Cash Cycles
        4. 82.1.4. Cash-Flow Variability
        5. 82.1.5. The Role of the Treasury Manager
        6. 82.1.6. Essential Treasury Concepts
          1. 82.1.6.1. Float
          2. 82.1.6.2. Availability
          3. 82.1.6.3. Finality
          4. 82.1.6.4. Idle Balances
          5. 82.1.6.5. The Account Analysis
      2. 82.2. PAYMENT SYSTEMS
        1. 82.2.1. Fedwire System
        2. 82.2.2. Automated Clearinghouse
        3. 82.2.3. Purchasing Cards
        4. 82.2.4. Paper-Based Transactions
      3. 82.3. COLLECTION SYSTEMS
        1. 82.3.1. Mail Float
        2. 82.3.2. Processing Float
        3. 82.3.3. Availability Float
      4. 82.4. LOCKBOXING
        1. 82.4.1. Lockbox Services
        2. 82.4.2. Wholesale Lockboxing
      5. 82.5. CASH MOBILIZATION
        1. 82.5.1. Concentration Systems
          1. 82.5.1.1. Concentration Decision Factors
      6. 82.6. DISBURSEMENT SYSTEMS
        1. 82.6.1. Regular Checking and Zero-Balance Accounts
        2. 82.6.2. Controlled Disbursement and Positive Pay
          1. 82.6.2.1. Controlled Disbursement
          2. 82.6.2.2. Positive Pay
        3. 82.6.3. Other Disbursement Services
          1. 82.6.3.1. Reconciliation
          2. 82.6.3.2. Comprehensive Payables
      7. 82.7. SUMMARY
    56. REFERENCES
    57. 83. Advanced Treasury Management Concepts
      1. 83.1. LIQUIDITY MANAGEMENT
        1. 83.1.1. Cash Forecasting
          1. 83.1.1.1. Cash Budgeting
          2. 83.1.1.2. The Distribution Method
          3. 83.1.1.3. Cash Modeling
          4. 83.1.1.4. Choosing a Forecasting Method
        2. 83.1.2. Issues in Short-Term Liquidity
          1. 83.1.2.1. Short-Term Investment Objectives
          2. 83.1.2.2. Investment Policies
          3. 83.1.2.3. Short-Term Credit
        3. 83.1.3. Other Credit Facilities
      2. 83.2. INTERNATIONAL TREASURY MANAGEMENT
        1. 83.2.1. Differences Between U.S. and International Treasury Management
          1. 83.2.1.1. Complexities of International Treasury Management
          2. 83.2.1.2. Banking Compensation
        2. 83.2.2. International Risk
        3. 83.2.3. Foreign Exchange Risk
          1. 83.2.3.1. Cross-Border Commercial Risk
          2. 83.2.3.2. Risk Management Tools
        4. 83.2.4. Other Issues in International Treasury Management
          1. 83.2.4.1. Cross-Border Clearing and Settlement
          2. 83.2.4.2. International Treasury Systems
          3. 83.2.4.3. Pooling
          4. 83.2.4.4. Netting
      3. 83.3. TREASURY INFORMATION SYSTEMS
        1. 83.3.1. Standard Modules
        2. 83.3.2. Advanced Functionality
          1. 83.3.2.1. Modules for International Treasury Management
          2. 83.3.2.2. Modules for Debt and Investment Management
          3. 83.3.2.3. Modules for Intracompany Data Exchange
        3. 83.3.3. Benefits of Current Treasury Systems
          1. 83.3.3.1. Provider Support
      4. 83.4. BANK RELATIONSHIP MANAGEMENT
        1. 83.4.1. Considerations in Relationship Management
          1. 83.4.1.1. Twenty-first-Century Relationship Management
          2. 83.4.1.2. The Request for Proposal
          3. 83.4.1.3. Bank Pricing
        2. 83.4.2. Banking Relationships in the Twenty-first Century
          1. 83.4.2.1. Service-Level Agreements
          2. 83.4.2.2. Relationship Reviews
          3. 83.4.2.3. Future Role of the Treasurer
      5. 83.5. SUMMARY
    58. REFERENCES
    59. 84. Management of Accounts Receivable
      1. 84.1. REASONS FOR EXTENDING CREDIT
      2. 84.2. COSTS OF CREDIT
        1. 84.2.1. The Cost of Discounts
        2. 84.2.2. Other Costs
        3. 84.2.3. The Implicit Cost of Trade Credit to the Customer
        4. 84.2.4. Credit and the Demand for a Company's Goods and Services
      3. 84.3. CREDIT AND COLLECTION POLICIES
        1. 84.3.1. Credit Policies
        2. 84.3.2. Evaluation of Creditworthiness
        3. 84.3.3. Collection Policies
      4. 84.4. MONITORING ACCOUNTS RECEIVABLE
        1. 84.4.1. Establishing and Changing Credit Policies
      5. 84.5. CAPTIVE FINANCE SUBSIDIARIES
      6. 84.6. SECURITIZATION OF ACCOUNTS RECEIVABLE
      7. 84.7. SUMMARY
    60. REFERENCES
    61. 85. Inventory Management
      1. 85.1. REASONS FOR HOLDING INVENTORY
      2. 85.2. COSTS ASSOCIATED WITH INVENTORY
      3. 85.3. MODELS OF INVENTORY MANAGEMENT
        1. 85.3.1. The Economic Order Quantity Model
        2. 85.3.2. Just-in-Time Inventory
        3. 85.3.3. Other Considerations
      4. 85.4. MONITORING INVENTORY MANAGEMENT
      5. 85.5. SUMMARY
    62. REFERENCES
    63. 86. Acquisitions and Takeovers
      1. 86.1. BACKGROUND ON ACQUISITIONS
        1. 86.1.1. Classifying Acquisitions
        2. 86.1.2. The Process of an Acquisition
      2. 86.2. EMPIRICAL EVIDENCE ON THE VALUE EFFECTS OF TAKEOVERS
      3. 86.3. STEPS IN AN ACQUISITION
        1. 86.3.1. Developing an Acquisition Strategy
          1. 86.3.1.1. Acquire Undervalued Firms
          2. 86.3.1.2. Diversify to Reduce Risk
          3. 86.3.1.3. Create Operating or Financial Synergy
          4. 86.3.1.4. Take Over Poorly Managed Firms and Change Management
          5. 86.3.1.5. Cater to Managerial Self-Interest
        2. 86.3.2. Choosing a Target Firm and Valuing Control/Synergy
          1. 86.3.2.1. Choosing a Target Firm
          2. 86.3.2.2. Valuing the Target Firm
          3. 86.3.2.3. Takeover Valuation: Biases and Common Errors
        3. 86.3.3. Structuring the Acquisition
          1. 86.3.3.1. Deciding on an Acquisition Price
          2. 86.3.3.2. Payment for the Target Firm
          3. 86.3.3.3. Accounting Considerations
      4. 86.4. ANALYZING MANAGEMENT AND LEVERAGED BUYOUTS
        1. 86.4.1. The Valuation of a Buyout
        2. 86.4.2. Valuing a Leveraged Buyout
      5. 86.5. SUMMARY
    64. REFERENCES
    65. 87. Taking Control of a Company
      1. 87.1. THE RISE OF MERGERS AND ACQUISITIONS
        1. 87.1.1. Merger and Acquisition Waves
        2. 87.1.2. Macroeconomic Factors
        3. 87.1.3. Microeconomic Factors
        4. 87.1.4. Human Factors
        5. 87.1.5. The Larger Context
      2. 87.2. CHOOSING A NEGOTIATING STRATEGY
        1. 87.2.1. Private Negotiation
          1. 87.2.1.1. Memorandum of Understanding or Letter of Intent
          2. 87.2.1.2. Agreement in Principle
          3. 87.2.1.3. Financial Sweeteners
        2. 87.2.2. Auction
        3. 87.2.3. The Outcome of Negotiations
      3. 87.3. TAKING OVER A LISTED EUROPEAN COMPANY
        1. 87.3.1. Stake Building
        2. 87.3.2. Type of Offer
          1. 87.3.2.1. Cash and Share Offers
          2. 87.3.2.2. Voluntary and Mandatory Offers
          3. 87.3.2.3. Hostile and Recommended Offers
        3. 87.3.3. Certainty of the Offer
        4. 87.3.4. Market Authority Role
        5. 87.3.5. Summary of National Regulations
        6. 87.3.6. Contingent Value Rights
      4. 87.4. SUMMARY
    66. REFERENCES
    67. 88. Mergers and Demergers
      1. 88.1. ALL-SHARE DEALS
        1. 88.1.1. The Different Techniques
          1. 88.1.1.1. Legal Merger
          2. 88.1.1.2. Contribution of Shares
          3. 88.1.1.3. Asset Contribution
        2. 88.1.2. Analysis of the Different Techniques
          1. 88.1.2.1. Company Perspective
          2. 88.1.2.2. Shareholder's Perspective
          3. 88.1.2.3. Pros and Cons of Paying in Shares
      2. 88.2. THE MECHANICS OF ALL-SHARE TRANSACTIONS
        1. 88.2.1. Relative Value Ratio and Exchange Ratio
        2. 88.2.2. Dilution or Accretion Criteria
          1. 88.2.2.1. Synergies
        3. 88.2.3. The "Bootstrap Game"
      3. 88.3. DEMERGERS AND SPLIT-OFFS
        1. 88.3.1. Principles
        2. 88.3.2. Why Demerge?
      4. 88.4. SUMMARY
    68. REFERENCES
    69. 89. Leveraged Buyouts
      1. 89.1. LBO STRUCTURES
      2. 89.2. TYPES OF LBO TRANSACTIONS
      3. 89.3. EXIT STRATEGIES
      4. 89.4. THE PLAYERS
        1. 89.4.1. Potential Targets
        2. 89.4.2. The Sellers
      5. 89.5. LBO FUNDS ARE THE EQUITY INVESTORS
      6. 89.6. THE LENDERS
        1. 89.6.1. Senior Debt
        2. 89.6.2. Junior or Subordinated Bonds
        3. 89.6.3. Mezzanine Debt
        4. 89.6.4. Securitization
      7. 89.7. LBOs AND FINANCIAL THEORY
      8. 89.8. SUMMARY
    70. REFERENCES