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Modern Portfolio Theory and Investment Analysis, 9th Edition

Book Description

Modern Portfolio Theory and Investment Analysis, 9th Edition examines the characteristics and analysis of individual securities, as well as the theory and practice of optimally combining securities into portfolios. It stresses the economic intuition behind the subject matter while presenting advanced concepts of investment analysis and portfolio management.

The authors present material that captures the state of modern portfolio analysis, general equilibrium theory, and investment analysis in an accessible and intuitive manner.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Dedication
  5. About the Authors
  6. New to the 9th Edition
  7. Preface
  8. Contents
  9. Part 1: INTRODUCTION
    1. Chapter 1: Introduction
      1. OUTLINE OF THE BOOK
      2. THE ECONOMIC THEORY OF CHOICE: AN ILLUSTRATION UNDER CERTAINTY
      3. CONCLUSION
      4. MULTIPLE ASSETS AND RISK
      5. QUESTIONS AND PROBLEMS
      6. BIBLIOGRAPHY
    2. Chapter 2: Financial Securities
      1. TYPES OF MARKETABLE FINANCIAL SECURITIES
      2. THE RETURN CHARACTERISTICS OF ALTERNATIVE SECURITY TYPES
      3. STOCK MARKET INDEXES
      4. BOND MARKET INDEXES
      5. CONCLUSION
    3. Chapter 3: Financial Markets
      1. TRADING MECHANICS
      2. MARGIN
      3. MARKETS
      4. TRADE TYPES AND COSTS
      5. CONCLUSION
  10. Part 2: PORTFOLIO ANALYSIS
    1. Section 1: Mean Variance Portfolio Theory
      1. Chapter 4: The Characteristics of the Opportunity Set under Risk
        1. DETERMINING THE AVERAGE OUTCOME
        2. A MEASURE OF DISPERSION
        3. VARIANCE OF COMBINATIONS OF ASSETS
        4. CHARACTERISTICS OF PORTFOLIOS IN GENERAL
        5. TWO CONCLUDING EXAMPLES
        6. CONCLUSION
        7. QUESTIONS AND PROBLEMS
        8. BIBLIOGRAPHY
      2. Chapter 5: Delineating Efficient Portfolios
        1. COMBINATIONS OF TWO RISKY ASSETS REVISITED: SHORT SALES NOT ALLOWED
        2. THE SHAPE OF THE PORTFOLIO POSSIBILITIES CURVE
        3. THE EFFICIENT FRONTIER WITH RISKLESS LENDING AND BORROWING
        4. EXAMPLES AND APPLICATIONS
        5. THREE EXAMPLES
        6. CONCLUSION
        7. QUESTIONS AND PROBLEMS
        8. BIBLIOGRAPHY
      3. Chapter 6: Techniques for Calculating the Efficient Frontier
        1. SHORT SALES ALLOWED WITH RISKLESS LENDING AND BORROWING
        2. SHORT SALES ALLOWED: NO RISKLESS LENDING AND BORROWING
        3. RISKLESS LENDING AND BORROWING WITH SHORT SALES NOT ALLOWED
        4. NO SHORT SELLING AND NO RISKLESS LENDING AND BORROWING
        5. THE INCORPORATION OF ADDITIONAL CONSTRAINTS
        6. AN EXAMPLE
        7. CONCLUSION
        8. APPENDIX A: AN ALTERNATIVE DEFINITION OF SHORT SALES
        9. APPENDIX B: DETERMINING THE DERIVATIVE
        10. APPENDIX C: SOLVING SYSTEMS OF SIMULTANEOUS EQUATIONS
        11. APPENDIX D: A GENERAL SOLUTION
        12. APPENDIX E: QUADRATIC PROGRAMMING AND KUHN–TUCKER CONDITIONS
        13. QUESTIONS AND PROBLEMS
        14. BIBLIOGRAPHY
    2. Section 2: Simplifying the Portfolio Selection Process
      1. Chapter 7: The Correlation Structure of Security Returns—the Single-Index Model
        1. THE INPUTS TO PORTFOLIO ANALYSIS
        2. SINGLE-INDEX MODELS: AN OVERVIEW
        3. CHARACTERISTICS OF THE SINGLE-INDEX MODEL
        4. ESTIMATING BETA
        5. THE MARKET MODEL
        6. AN EXAMPLE
        7. QUESTIONS AND PROBLEMS
        8. BIBLIOGRAPHY
      2. Chapter 8: The Correlation Structure of Security Returns—Multi-Index Models and Grouping Techniques
        1. MULTI-INDEX MODELS
        2. AVERAGE CORRELATION MODELS
        3. MIXED MODELS
        4. FUNDAMENTAL MULTI-INDEX MODELS
        5. CONCLUSION
        6. APPENDIX A: PROCEDURE FOR REDUCING ANY MULTI-INDEX MODEL TO A MULTI-INDEX MODEL WITH ORTHOGONAL INDEXES
        7. APPENDIX B: MEAN RETURN, VARIANCE, AND COVARIANCE OF A MULTI-INDEX MODEL
        8. QUESTIONS AND PROBLEMS
        9. BIBLIOGRAPHY
      3. Chapter 9: Simple Techniques for Determining the Efficient Frontier
        1. THE SINGLE-INDEX MODEL
        2. SECURITY SELECTION WITH A PURCHASABLE INDEX
        3. THE CONSTANT CORRELATION MODEL
        4. OTHER RETURN STRUCTURES
        5. AN EXAMPLE
        6. CONCLUSION
        7. APPENDIX A: SINGLE-INDEX MODEL—SHORT SALES ALLOWED
        8. APPENDIX B: CONSTANT CORRELATION COEFFICIENT—SHORT SALES ALLOWED
        9. APPENDIX C: SINGLE-INDEX MODEL—SHORT SALES NOT ALLOWED
        10. APPENDIX D: CONSTANT CORRELATION COEFFICIENT—SHORT SALES NOT ALLOWED
        11. APPENDIX E: SINGLE-INDEX MODEL, SHORT SALES ALLOWED, AND A MARKET ASSET
        12. QUESTIONS AND PROBLEMS
        13. BIBLIOGRAPHY
    3. Section 3: Selecting the Optimum Portfolio
      1. Chapter 10: Estimating Expected Returns
        1. AGGREGATE ASSET ALLOCATION
        2. FORECASTING INDIVIDUAL SECURITY RETURNS
        3. PORTFOLIO ANALYSIS WITH DISCRETE DATA
        4. APPENDIX: THE ROSS RECOVERY THEOREM—A NEW APPROACH TO USING MARKET DATA TO CALCULATE EXPECTED RETURN
        5. BIBLIOGRAPHY
      2. Chapter 11: How to Select among the Portfolios in the Opportunity Set
        1. CHOOSING DIRECTLY
        2. AN INTRODUCTION TO PREFERENCE FUNCTIONS
        3. RISK TOLERANCE FUNCTIONS
        4. SAFETY FIRST
        5. MAXIMIZING THE GEOMETRIC MEAN RETURN
        6. VALUE AT RISK (VaR)
        7. UTILITY AND THE EQUITY RISK PREMIUM
        8. OPTIMAL INVESTMENT STRATEGIES WITH INVESTOR LIABILITIES
        9. LIABILITIES AND SAFETY-FIRST PORTFOLIO SELECTION
        10. SIMULATIONS IN PORTFOLIO CHOICE
        11. CONCLUSION
        12. APPENDIX: THE ECONOMIC PROPERTIES OF UTILITY FUNCTIONS
        13. RELATIVE RISK AVERSION AND WEALTH
        14. QUESTIONS AND PROBLEMS
        15. BIBLIOGRAPHY
    4. Section 4: WIDENING THE SELECTION UNIVERSE
      1. Chapter 12: International Diversification
        1. HISTORICAL BACKGROUND
        2. CALCULATING THE RETURN ON FOREIGN INVESTMENTS
        3. THE RISK OF FOREIGN SECURITIES
        4. MARKET INTEGRATION
        5. RETURNS FROM INTERNATIONAL DIVERSIFICATION
        6. THE EFFECT OF EXCHANGE RISK
        7. RETURN EXPECTATIONS AND PORTFOLIO PERFORMANCE
        8. EMERGING MARKETS
        9. OTHER EVIDENCE ON INTERNATIONALLY DIVERSIFIED PORTFOLIOS
        10. SOVEREIGN FUNDS
        11. MODELS FOR MANAGING INTERNATIONAL PORTFOLIOS
        12. CONCLUSION
        13. QUESTIONS AND PROBLEMS
        14. BIBLIOGRAPHY
  11. Part 3: MODELS OF EQUILIBRIUM IN THE CAPITAL MARKETS
    1. Chapter 13: The Standard Capital Asset Pricing Model
      1. THE ASSUMPTIONS UNDERLYING THE STANDARD CAPITAL ASSET PRICING MODEL (CAPM)
      2. THE CAPM
      3. PRICES AND THE CAPM
      4. CONCLUSION
      5. APPENDIX: Appropriateness of the Single-Period Asset Pricing Model
      6. QUESTIONS AND PROBLEMS
      7. BIBLIOGRAPHY
    2. Chapter 14: Nonstandard Forms of Capital Asset Pricing Models
      1. SHORT SALES DISALLOWED
      2. MODIFICATIONS OF RISKLESS LENDING AND BORROWING
      3. PERSONAL TAXES
      4. NONMARKETABLE ASSETS
      5. HETEROGENEOUS EXPECTATIONS
      6. NON-PRICE-TAKING BEHAVIOR
      7. MULTIPERIOD CAPM
      8. THE MULTI-BETA CAPM
      9. CONSUMPTION CAPM
      10. CONCLUSION
      11. APPENDIX: DERIVATION OF THE GENERAL EQUILIBRIUM WITH TAXES
      12. QUESTIONS AND PROBLEMS
      13. BIBLIOGRAPHY
    3. Chapter 15: Empirical Tests of Equilibrium Models
      1. THE MODELS—EX ANTE EXPECTATIONS AND EX POST TESTS
      2. EMPIRICAL TESTS OF THE CAPM
      3. TESTING SOME ALTERNATIVE FORMS OF THE CAPM MODEL
      4. TESTING THE POSTTAX FORM OF THE CAPM MODEL
      5. SOME RESERVATIONS ABOUT TRADITIONAL TESTS OF GENERAL EQUILIBRIUM RELATIONSHIPS AND SOME NEW RESEARCH
      6. CONCLUSION
      7. QUESTIONS AND PROBLEMS
      8. BIBLIOGRAPHY
    4. Chapter 16: The Arbitrage Pricing Model APT—A Multifactor Approach to Explaining Asset Prices
      1. APT—WHAT IS IT?
      2. ESTIMATING AND TESTING APT
      3. APT AND CAPM
      4. RECAPITULATION
      5. TERM STRUCTURE FACTOR
      6. CREDIT RISK FACTOR
      7. FOREIGN EXCHANGE [FX] CARRY
      8. VALUE FACTOR
      9. SIZE FACTOR
      10. MOMENTUM FACTOR
      11. VOLATILITY FACTOR
      12. LIQUIDITY FACTOR
      13. INFLATION FACTOR
      14. GDP FACTOR
      15. EQUITY RISK PREMIUM
      16. LIMITATIONS OF FACTOR INVESTING
      17. FACTOR INVESTING SUMMARY
      18. CONCLUSION
      19. APPENDIX A: A SIMPLE EXAMPLE OF FACTOR ANALYSIS
      20. APPENDIX B: SPECIFICATION OF THE APT WITH AN UNOBSERVED MARKET FACTOR
      21. QUESTIONS AND PROBLEMS
      22. BIBLIOGRAPHY
  12. Part 4: SECURITY ANALYSIS AND PORTFOLIO THEORY
    1. Chapter 17: Efficient Markets
      1. EARLY DEVELOPMENT
      2. THE NEXT STAGES OF THEORY
      3. RECENT THEORY 5
      4. SOME BACKGROUND
      5. TESTING THE EMH 6
      6. TESTS OF RETURN PREDICTABILITY
      7. TESTS ON PRICES AND RETURNS
      8. MONTHLY PATTERNS
      9. ANNOUNCEMENT AND PRICE RETURN
      10. METHODOLOGY OF EVENT STUDIES
      11. STRONG-FORM EFFICIENCY
      12. MARKET RATIONALITY
      13. CONCLUSION
      14. QUESTIONS AND PROBLEMS
      15. BIBLIOGRAPHY
    2. Chapter 18: The Valuation Process
      1. DISCOUNTED CASH FLOW MODELS
      2. CROSS-SECTIONAL REGRESSION ANALYSIS
      3. AN ONGOING SYSTEM
      4. CONCLUSION
      5. QUESTIONS AND PROBLEMS
      6. BIBLIOGRAPHY
    3. Chapter 19: Earnings Estimation
      1. THE ELUSIVE NUMBER CALLED EARNINGS
      2. THE IMPORTANCE OF EARNINGS
      3. CHARACTERISTICS OF EARNINGS AND EARNINGS FORECASTS
      4. CONCLUSION
      5. QUESTIONS AND PROBLEMS
      6. BIBLIOGRAPHY
    4. Chapter 20: Behavioral Finance, Investor Decision Making, and Asset Prices
      1. PROSPECT THEORY AND DECISION MAKING UNDER UNCERTAINTY
      2. BIASES FROM LABORATORY EXPERIMENTS
      3. SUMMARY OF INVESTOR BEHAVIOR
      4. BEHAVIORAL FINANCE AND ASSET PRICING THEORY
      5. BIBLIOGRAPHY
    5. Chapter 21: Interest Rate Theory and the Pricing of Bonds
      1. AN INTRODUCTION TO DEBT SECURITIES
      2. THE MANY DEFINITIONS OF RATES
      3. BOND PRICES AND SPOT RATES
      4. DETERMINING SPOT RATES
      5. THE DETERMINANTS OF BOND PRICES
      6. COLLATERAL MORTGAGE OBLIGATIONS
      7. THE FINANCIAL CRISIS OF 2008
      8. CONCLUSION
      9. APPENDIX A: SPECIAL CONSIDERATIONS IN BOND PRICING
      10. APPENDIX B: ESTIMATING SPOT RATES
      11. APPENDIX C: CALCULATING BOND EQUIVALENT YIELD AND EFFECTIVE ANNUAL YIELD
      12. QUESTIONS AND PROBLEMS
      13. BIBLIOGRAPHY
    6. Chapter 22: The Management of Bond Portfolios
      1. DURATION
      2. PROTECTING AGAINST TERM STRUCTURE SHIFTS
      3. BOND PORTFOLIO MANAGEMENT OF YEARLY RETURNS
      4. SWAPS
      5. APPENDIX A: DURATION MEASURES
      6. APPENDIX B: EXACT MATCHING PROGRAMS
      7. APPENDIX C: BOND-SWAPPING TECHNIQUES
      8. APPENDIX D: CONVEXITY
      9. QUESTIONS AND PROBLEMS
      10. BIBLIOGRAPHY
    7. Chapter 23: Option Pricing Theory
      1. TYPES OF OPTIONS
      2. SOME BASIC CHARACTERISTICS OF OPTION VALUES 5
      3. VALUATION MODELS
      4. ARTIFICIAL OR HOMEMADE OPTIONS
      5. USES OF OPTIONS
      6. CONCLUSION
      7. APPENDIX A: DERIVATION OF THE BINOMIAL FORMULA
      8. APPENDIX B: DERIVATION OF THE BLACK–SCHOLES FORMULA
      9. QUESTIONS AND PROBLEMS
      10. BIBLIOGRAPHY
    8. Chapter 24: The Valuation and Uses of Financial Futures
      1. DESCRIPTION OF FINANCIAL FUTURES
      2. VALUATION OF FINANCIAL FUTURES
      3. THE USES OF FINANCIAL FUTURES
      4. NONFINANCIAL FUTURES AND COMMODITY FUNDS
      5. QUESTIONS AND PROBLEMS
      6. BIBLIOGRAPHY
  13. Part 5: EVALUATING THE INVESTMENT PROCESS
    1. Chapter 25: Mutual Funds
      1. OPEN-END MUTUAL FUNDS
      2. CLOSED-END MUTUAL FUNDS
      3. EXCHANGE-TRADED FUNDS (ETFS)
      4. CONCLUSION
      5. BIBLIOGRAPHY
    2. Chapter 26: Evaluation of Portfolio Performance
      1. EVALUATION TECHNIQUES
      2. A MANIPULATION-PROOF PERFORMANCE MEASURE
      3. TIMING
      4. HOLDING MEASURES OF TIMING
      5. MULTI-INDEX MODELS AND PERFORMANCE MEASUREMENT
      6. USING HOLDINGS DATA TO MEASURE PERFORMANCE DIRECTLY
      7. TIME-VARYING BETAS
      8. CONDITIONAL MODELS OF PERFORMANCE MEASUREMENT, BAYESIAN ANALYSIS, AND STOCHASTIC DISCOUNT FACTORS
      9. BAYESIAN ANALYSIS 12
      10. STOCHASTIC DISCOUNT FACTORS
      11. WHAT'S A RESEARCHER TO DO?
      12. MEASURING THE PERFORMANCE OF ACTIVE BOND FUNDS
      13. THE PERFORMANCE OF ACTIVELY MANAGED MUTUAL FUNDS
      14. HOW HAVE MUTUAL FUNDS DONE?
      15. THE PERSISTENCE OF PERFORMANCE
      16. PERSISTENCE
      17. APPENDIX: The Use of APT Models to Evaluate and Diagnose Performance
      18. QUESTIONS AND PROBLEMS
      19. BIBLIOGRAPHY
    3. Chapter 27: Evaluation of Security Analysis
      1. WHY THE EMPHASIS ON EARNINGS?
      2. THE EVALUATION OF EARNINGS FORECASTS
      3. EVALUATING THE VALUATION PROCESS
      4. CONCLUSION
      5. QUESTIONS AND PROBLEMS
      6. BIBLIOGRAPHY
    4. Chapter 28: Portfolio Management Revisited
      1. MANAGING STOCK PORTFOLIOS
      2. ACTIVE MANAGEMENT
      3. PASSIVE VERSUS ACTIVE
      4. INTERNATIONAL DIVERSIFICATION
      5. BOND MANAGEMENT
      6. BOND AND STOCK INVESTMENT WITH A LIABILITY STREAM
      7. BIBLIOGRAPHY
  14. Index