Table of contents for Investments / Zvi Bodie, Alex Kane, Alan J. Marcus.

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CONTENTS
Part I
INTRODUCTION?1
CHAPTER 1
THE INVESTMENT ENVIRONMENT
1.1	Real Assets versus Financial Assets?2
1.2	A Taxonomy of Financial Assets?4
1.3	Financial Markets and the Economy?5
The Informational Role of Financial Markets / Consumption Timing / Allocation of 
Risk / Separation of 
Ownership and Management / Corporate Governance and Corporate Ethics
1.4	The Investment Process?9
Saving, Investing, and Safe Investing-
1.5	Markets Are Competitive?10
The Risk?Return Trade-Off / Efficient Markets
1.6	The Players?12
Financial Intermediaries / Investment Bankers
1.7	Recent Trends?15
Globalization / Securitization / Financial Engineering / Computer Networks
1.8	Outline of the Text?19
Summary?19
Key Terms?20
Web Sites?20
E-Investments: Savings and Investing?21
Standard & Poor?s?21
Problems?21
Solutions to Concept Checks?23
CHAPTER 2
ASSET CLASSES AND FINANCIAL INSTRUMENTS
2.1	The Money Market?26
Treasury Bills / Certificates of Deposit / Commercial Paper / Bankers? 
Acceptances / Eurodollars / Repos 
and Reverses / Federal Funds / Brokers? Calls / The LIBOR Market / Yields on 
Money Market Instruments
2.2	The Bond Market?30
Treasury Notes and Bonds / Inflation-Protected Treasury Bonds / Federal Agency 
Debt / International Bonds 
/ Municipal Bonds / Corporate Bonds / Mortgages and Mortgage-Backed Securities
2.3	Equity Securities?38
Common Stock as Ownership Shares / Characteristics of Common Stock / Stock 
Market Listings / Preferred 
Stock / Depository Receipts
2.4	Stock and Bond Market Indexes?41
Stock Market Indexes / Dow Jones Averages / Standard & Poor?s Indexes / Other 
U.S. Market-Value Indexes 
/ Equally Weighted Indexes / Foreign and International Stock Market Indexes / 
Bond Market Indicators
2.5	Derivative Markets?47
Options / Futures Contracts
Summary?51
Key Terms?52
Web Sites?52
E-Investments: Security Prices and Returns?52
Standard & Poor?s?53
Problems?53
Solutions to Concept Checks?55
CHAPTER 3
HOW SECURITIES ARE TRADED
3.1	How Firms Issue Securities?57
Investment Banking / Shelf Registration / Private Placements / Initial Public 
Offerings
3.2	How Securities Are Traded?62
Types of Markets
Direct Search Markets / Brokered Markets / Dealer Markets / Auction Markets
Types of Orders
Market Orders / Price-Contingent Orders
Trading Mechanisms
Dealer Markets / Electronic Communication Networks (ECNs) / Specialist Markets
3.3	U.S. Securities Markets?68
Nasdaq / The New York Stock Exchange
Block Sales / SuperDot and Electronic Trading on the NYSE / Settlement
Electronic Communication Networks / The National Market System / Bond Trading
3.4	Market Structure in Other Countries?74
London / Euronext / Tokyo / Globalization and Consolidation of Stock Markets
3.5	Trading Costs?76
3.6	Buying on Margin?78
3.7	Short Sales?81
3.8	Regulation of Securities Markets?83
Self-Regulation / Regulatory Responses to Recent Scandals / Circuit Breakers / 
Insider Trading
Summary?88
Key Terms?88
Web Sites?89
E-Investments: Short Sales?89
Standard & Poor?s?90
Problems?90
Solutions to Concept Checks?93
CHAPTER 4
MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES
4.1	Investment Companies?95
4.2	Types of Investment Companies?96
Unit Investment Trusts / Managed Investment Companies / Other Investment 
Organizations
Commingled Funds / Real Estate Investment Trusts (REITS) / Hedge Funds
4.3	Mutual Funds?100
Investment Policies
Money Market Funds / Equity Funds / Bond Funds / International Funds / Balanced 
Funds / Asset 
Allocation and Flexible Funds / Index Funds /
How Funds Are Sold
4.4	Costs of Investing in Mutual Funds?104
Fee Structure
Front-End Load / Back-End Load / Operating Expenses / 12b-1 Charges
Fees and Mutual Fund Returns / Late Trading and Market Timing
4.5	Taxation of Mutual Fund Income?109
4.6	Exchange-Traded Funds?110
4.7	Mutual Fund Investment Performance: A First Look?111
4.8	Information on Mutual Funds?114
Summary?118
Key Terms?118
Web Sites?118
E-Investments: Choosing a Mutual Fund?119
Standard & Poor?s?119
Problems?119
Solutions to Concept Checks?121
Part II
PORTFOLIO THEORY AND PRACTICE
CHAPTER 5
LEARNING ABOUT RETURN AND RISK FROM THE HISTORICAL RECORD
5.1	Determinants of the Level of Interest Rates?124
Real and Nominal Rates of Interest / The Equilibrium Real Rate of Interest / The 
Equilibrium Nominal Rate 
of Interest / Taxes and the Real Rate of Interest
5.2	Comparing Rates of Return for Different Holding Periods?128
Annual Percentage Rates / Continuous Compounding
5.3	Bills and Inflation, 1926?2005?131
5.4	Risk and Risk Premiums?133
Holding-Period Returns / Expected Return and Standard Deviation / Excess Returns 
and Risk Premiums
5.5	Time Series Analysis of Past Rates of Return?136
Time Series versus Scenario Analysis / Expected Returns and the Arithmetic 
Average / The Geometric (Time-
Weighted) Average Return / Variance and Standard Deviation / The Reward-to-
Variability (Sharpe) Ratio
5.6	The Normal Distribution?140
5.7	Deviations from Normality?142
5.8	The Historical Record of Returns on Equities and Long-Term Bonds?144
Average Returns and Standard Deviations / Other Statistics of the Risky 
Portfolios / Sharpe Ratios / Serial 
Correlation / Skewness and Kurtosis / Estimates of Historical Risk Premiums / A 
Global View of the 
Historical Record
5.9	Long-Term Investments?151
Risk in the Long Run and the Lognormal Distribution / The Sharpe Ratio Revisited 
/ Simulation of Long-
Term Future Rates of Return / Forecasts for the Long Haul
5.10	Measurement of Risk with Non-Normal Distributions?158
Value at Risk (VaR) / Conditional Tail Expectation (CTE) / Lower Partial 
Standard Deviation (LPSD)
Summary?160
Key Terms?160
Web Sites?160
E-Investments: Analytics Tutorial?161
Standard & Poor?s?161
Problems?161
Solutions to Concept Checks?164
CHAPTER 6
RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS
6.1	Risk and Risk Aversion?166
Risk, Speculation, and Gambling / Risk Aversion and Utility Values / Estimating 
Risk Aversion
6.2	Capital Allocation across Risky and Risk-Free Portfolios?174
6.3	The Risk-Free Asset?176
6.4	Portfolios of One Risky Asset and A Risk-Free Asset?177
6.5	Risk Tolerance and Asset Allocation?181
6.6	Passive Strategies: The Capital Market Line?186
Summary?190
Key Terms?191
Web Sites?191
E-Investments: Market Crashes?192
Standard & Poor?s?192
Problems?192
Solutions to Concept Checks?196
Appendix A: Risk Aversion, Expected Utility, and the St. Petersburg Paradox?199
Appendix B: Utility Functions and Equilibrium Prices of Insurance Contracts?202
CHAPTER 7
OPTIMAL RISKY PORTFOLIOS
7.1	Diversification and Portfolio Risk?206
7.2	Portfolios of Two Risky Assets?208
7.3	Asset Allocation with Stocks, Bonds, and Bills?216
The Optimal Risky Portfolio with Two Risky Assets and a Risk-Free Asset
7.4	The Markowitz Portfolio Selection Model?222
Security Selection / Capital Allocation and the Separation Property / The Power 
of Diversification / Asset 
Allocation and Security Selection
7.5	Risk Pooling, Risk Sharing, and Risk in the Long Run?231
Risk Pooling and the Insurance Principle / Risk Sharing
Summary?234
Key Terms?235
Web Sites?235
E-Investments: Risk Comparisons?236
Problems?236
Solutions to Concept Checks?241
Appendix A: A Spreadsheet Model?244
Appendix B: Review of Portfolio Statistics?249
CHAPTER 8
INDEX MODELS
8.1	A Single-Factor Security Market?258
The Input List of the Markowitz Model / Normality of Returns and Systematic Risk
8.2	The Single-Index Model?260
The Regression Equation of the Single-Index Model / The Expected Return?Beta 
Relationship / Risk and 
Covariance in the Single-Index Model / The Set of Estimates Needed for the 
Single-Index Model / The Index 
Model and Diversification
8.3	Estimating the Single-Index Model?265
The Security Characteristic Line for Hewlett-Packard / The Explanatory Power of 
the SCL for HP / Analysis 
of Variance / The Estimate of Alpha / The Estimate of Beta / Firm-Specific Risk 
/ Correlation and Covariance 
Matrix
8.4	Portfolio Construction and the Single-Index Model?270
Alpha and Security Analysis / The Index Portfolio as an Investment Asset / The 
Single-Index-Model Input List 
/ The Optimal Risky Portfolio of the Single-Index Model / The Information Ratio 
/ Summary of Optimization 
Procedure / An Example
Risk Premium Forecasts / The Optimal Risky Portfolio
8.5	Practical Aspects of Portfolio Management with the Index Model?280
Is the Index Model Inferior to the Full-Covariance Model? / The Industry Version 
of the Index Model / 
Predicting Betas / Index Models and Tracking Portfolios
Summary?286
Key Terms?287
Web Sites?287
E-Investments: Comparing Volatilities and Beta Coefficients?287
Standard & Poor?s?288
Problems?288
Solutions to Concept Checks?291
Part III
EQUILIBRIUM IN CAPITAL MARKETS
CHAPTER 9
THE CAPITAL ASSET PRICING MODEL
9.1	The Capital Asset Pricing Model?293
Why Do All Investors Hold the Market Portfolio? / The Passive Strategy Is 
Efficient / The Risk Premium of 
the Market Portfolio / Expected Returns on Individual Securities / The Security 
Market Line
9.2	The CAPM and the Index Model?306
Actual Returns versus Expected Returns / The Index Model and Realized Returns / 
The Index Model and the 
Expected Return?Beta Relationship
9.3	Is the CAPM Practical??308
Is the CAPM Testable? / The CAPM Fails Empirical Tests / The Economy and the 
Validity of the CAPM / 
The Investments Industry and the Validity of the CAPM
9.4	Econometrics and the Expected Return?Beta Relationship?312
9.5	Extensions of the CAPM?313
The Zero-Beta Model / Labor Income and Nontraded Assets / A Multiperiod Model 
and Hedge Portfolios
9.6	Liquidity and the CAPM?317
Summary?322
Key Terms?323
Web Sites?323
E-Investments: Beta Comparisons?323
Standard & Poor?s?324
Problems?324
Solutions to Concept Checks?328
CHAPTER 10
ARBITRAGE PRICING THEORY AND MULTIFACTOR MODELS OF RISK AND RETURN
10.1	Multifactor Models: An Overview?332
Factor Models of Security Returns / A Multifactor Security Market Line
10.2	Arbitrage Pricing Theory?336
Arbitrage, Risk Arbitrage, and Equilibrium / Well-Diversified Portfolios / Betas 
and Expected Returns / The 
One-Factor Security Market Line
10.3	Individual Assets and the APT?342
The APT and the CAPM
10.4	A Multifactor APT?343
10.5	Where Should We Look for Factors??345
10.6	A Multifactor CAPM and the APT?348
Summary?349
Key Terms?350
Web Sites?350
E-Investments: APT versus CAPM?350
Standard & Poor?s?350
Problems?351
Solutions to Concept Checks?354
CHAPTER 11
THE EFFICIENT MARKET HYPOTHESIS
11.1	Random Walks and the Efficient Market Hypothesis?358
Competition as the Source of Efficiency / Versions of the Efficient Market 
Hypothesis
11.2	Implications of the EMH?361
Technical Analysis / Fundamental Analysis / Active versus Passive Portfolio 
Management / The Role of 
Portfolio Management in an Efficient Market / Resource Allocation
11.3	Event Studies?366
11.4	Are Markets Efficient??369
The Issues
The Magnitude Issue / The Selection Bias Issue / The Lucky Event Issue
Weak-Form Tests: Patterns in Stock Returns
Returns over Short Horizons / Returns over Long Horizons
Predictors of Broad Market Returns / Semistrong Tests: Market Anomalies
The Small-Firm-in-January Effect / The Neglected-Firm Effect and Liquidity 
Effects / Book-to-Market 
Ratios / Post?Earnings-Announcement Price Drift
Strong-Form Tests: Inside Information / Interpreting the Evidence
Risk Premiums or Inefficiencies? / Anomalies or Data Mining?
11.5	Mutual Fund and Analyst Performance?381
Stock Market Analysts / Mutual Fund Managers / Survivorship Bias in Mutual Fund 
Studies / So, Are 
Markets Efficient?
Summary?387
Key Terms?388
Web Sites?388
E-Investments: Efficient Markets and Insider Trading?388
Standard & Poor?s?389
Problems?389
Solutions to Concept Checks?393
CHAPTER 12
BEHAVIORAL FINANCE AND TECHNICAL ANALYSIS
12.1	The Behavioral Critique?396
Information Processing
Forecasting Errors / Overconfidence / Conservatism / Sample Size Neglect and 
Representativeness
Behavioral Biases
Framing / Mental Accounting / Regret Avoidance / Prospect Theory
Limits to Arbitrage
Fundamental Risk / Implementation Costs /Model Risk
Limits to Arbitrage and the Law of One Price
?Siamese Twin? Companies / Equity Carve-outs / Closed-End Funds
Bubbles and Behavioral Economics / Evaluating the Behavioral Critique
12.2	Technical Analysis and Behavioral Finance?407
Trends and Corrections
Dow Theory / Moving Averages / Breadth
Sentiment Indicators
Trin Statistic / Confidence Index / Put/Call Ratio
A Warning
Summary?414
Key Terms?415
Web Sites?415
E-Investments: Technical Analysis versus Market Efficiency?415
Standard & Poor?s?415
Problems?416
Solutions to Concept Checks?420
CHAPTER 13
EMPIRICAL EVIDENCE ON SECURITY RETURNS
13.1	The Index Model and the Single-Factor APT?422
The Expected Return?Beta Relationship
Setting Up the Sample Data / Estimating the SCL / Estimating the SML
Tests of the CAPM / The Market Index / Measurement Error in Beta / The EMH and 
the CAPM / Accounting 
for Human Capital and Cyclical Variations in Asset Betas / Accounting for 
Nontraded Business
13.2	Tests of Multifactor CAPM and APT?433
A Macro Factor Model
13.3	The Fama-French Three-Factor Model?435
Risk-Based Interpretations / Behavioral Explanations
13.4	Liquidity and Asset Pricing?440
13.5	Time-Varying Volatility?443
The Volatility of Nasdaq Stocks
13.6	The Equity Premium Puzzle?446
Consumption Growth and Market Rates of Return / Expected versus Realized Returns 
/ Survivorship Bias / 
Extensions to the CAPM May Resolve the Equity Premium Puzzle / Behavioral 
Explanations of the Equity 
Premium Puzzle
Summary?453
Key Terms?454
Web Sites?454
E-Investments: Portfolio Theory?454
Standard & Poor?s?454
Problems?455
Solutions to Concept Checks?456
Part IV
FIXED-INCOME SECURITIES
CHAPTER 14
BOND PRICES AND YIELDS
14.1	Bond Characteristics?458
Treasury Bonds and Notes
Accrued Interest and Quoted Bond Prices
Corporate Bonds
Call Provisions on Corporate Bonds / Convertible Bonds / Puttable Bonds / 
Floating-Rate Bonds
Preferred Stock / Other Issuers / International Bonds / Innovation in the Bond 
Market
Inverse Floaters / Asset-Backed Bonds / Catastrophe Bonds / Indexed Bonds
14.2	Bond Pricing?464
Bond Pricing between Coupon Dates
14.3	Bond Yields?468
Yield to Maturity / Yield to Call / Realized Compound Return versus Yield to 
Maturity
14.4	Bond Prices over Time?475
Yield to Maturity versus Holding-Period Return / Zero-Coupon Bonds and Treasury 
Strips / After-Tax 
Returns
14.5	Default Risk and Bond Pricing?479
Junk Bonds / Determinants of Bond Safety / Bond Indentures
Sinking Funds / Subordination of Further Debt / Dividend Restrictions / 
Collateral
Yield to Maturity and Default Risk
Summary?487
Key Terms?487
Web Sites?488
E-Investments: Credit Spreads?488
Standard & Poor?s?488
Problems?488
Solutions to Concept Checks?493
CHAPTER 15
THE TERM STRUCTURE OF INTEREST RATES
15.1	The Yield Curve?495
Bond Pricing
15.2	The Yield Curve and Future Interest Rates?498
The Yield Curve Under Certainty / Holding-Period Returns / Forward Rates
15.3	Interest Rate Uncertainty and Forward Rates?503
15.4	Theories of the Term Structure?505
The Expectations Hypothesis / Liquidity Preference
15.5	Interpreting the Term Structure?507
15.6	Forward Rates as Forward Contracts?512
Summary?515
Key Terms?515
Web Sites?515
E-Investments: Real and Nominal Yield Curves?516
Problems?516
Solutions to Concept Checks?521
CHAPTER 16
MANAGING BOND PORTFOLIOS
16.1	Interest Rate Risk?524
Interest Rate Sensitivity / Duration / What Determines Duration?
Rule 1 for Duration / Rule 2 for Duration / Rule 3 for Duration / Rule 4 for 
Duration / Rule 5 for 
Duration
16.2	Convexity?534
Why Do Investors Like Convexity? / Duration and Convexity of Callable Bonds / 
Duration and Convexity of 
Mortgage-backed Securities
16.3	Passive Bond Management?542
Bond-Index Funds / Immunization / Cash Flow Matching and Dedication / Other 
Problems with 
Conventional Immunization
16.4	Active Bond Management?552
Sources of Potential Profit / Horizon Analysis / Contingent Immunization
16.5	Financial Engineering and Interest Rate Derivatives?555
Summary?557
Key Terms?558
Web Sites?558
E-Investments: Collateralized Mortgage Obligations?558
Standard & Poor?s?558
Problems?559
Solutions to Concept Checks?566
Part V
SECURITY ANALYSIS
CHAPTER 17
MACROECONOMIC AND INDUSTRY ANALYSIS
17.1	The Global Economy?570
17.2	The Domestic Macroeconomy?572
17.3	Demand and Supply Shocks?573
17.4	Federal Government Policy?574
Fiscal Policy / Monetary Policy / Supply-Side Policies
17.5	Business Cycles?576
The Business Cycle / Economic Indicators / Other Indicators
17.6	Industry Analysis?582
Defining an Industry / Sensitivity to the Business Cycle / Sector Rotation / 
Industry Life Cycles
Start-Up Stage / Consolidation Stage / Maturity Stage / Relative Decline
Industry Structure and Performance
Threat of Entry / Rivalry between Existing Competitors / Pressure from 
Substitute Products / Bargaining 
Power of Buyers / Bargaining Power of Suppliers
Summary?594
Key Terms?594
Web Sites?594
E-Investments: The Macroeconomy?595
Standard & Poor?s?595
Problems?595
Solutions to Concept Checks?600
CHAPTER 18
EQUITY VALUATION MODELS
18.1	Valuation by Comparables?603
Limitations of Book Value
18.2	Intrinsic Value versus Market Price?605
18.3	Dividend Discount Models?607
The Constant-Growth DDM / Convergence of Price to Intrinsic Value / Stock Prices 
and Investment 
Opportunities / Life Cycles and Multistage Growth Models / Multistage Growth 
Models
18.4	Price?Earnings Ratio?621
The Price?Earnings Ratio and Growth Opportunities / P/E Ratios and Stock Risk / 
Pitfalls in P/E Analysis / 
Combining P/E Analysis and the DDM / Other Comparative Valuation Ratios
Price-to-Book Ratio / Price-to-Cash-Flow Ratio / Price-to-Sales Ratio
18.5	Free Cash Flow Valuation Approaches?630
Comparing the Valuation Models
18.6	The Aggregate Stock Market?634
Explaining Past Behavior / Forecasting the Stock Market
Summary?636
Key Terms?637
Web Sites?638
E-Investments: Equity Valuation?638
Standard & Poor?s?638
Problems?639
Solutions to Concept Checks?647
CHAPTER 19
FINANCIAL STATEMENT ANALYSIS
19.1	The Major Financial Statements?649
The Income Statement / The Balance Sheet / The Statement of Cash Flows
19.2	Accounting versus Economic Earnings?654
19.3	Profitability Measures?654
Past versus Future ROE / Financial Leverage and ROE
19.4	Ratio Analysis?657
Decomposition of ROE / Turnover and Other Asset Utilization Ratios / Liquidity 
Ratios / Market Price Ratios 
/ Choosing a Benchmark
19.5	Economic Value Added?666
19.6	An Illustration of Financial Statement Analysis?669
19.7	Comparability Problems?671
Inventory Valuation / Depreciation / Inflation and Interest Expense / Quality of 
Earnings / International 
Accounting Conventions
19.8	Value Investing: The Graham Technique?676
Summary?678
Key Terms?678
Web Sites?678
E-Investments: Financial Statement Analysis?679
Standard & Poor?s?679
Problems?679
Solutions to Concept Checks?688
PART VI
OPTIONS, FUTURES, AND OTHER DERIVATIVES
CHAPTER 20
OPTIONS MARKETS: INTRODUCTION
20.1	The Option Contract?692
Options Trading / American and European Options / Adjustments in Option Contract 
Terms / The Option 
Clearing Corporation / Other Listed Options
Index Options / Futures Options / Foreign Currency Options / Interest Rate 
Options
20.2	Values of Options at Expiration?698
Call Options / Put Options / Option versus Stock Investments
20.3	Option Strategies?703
Protective Put / Covered Calls / Straddle / Spreads / Collars
20.4	The Put-Call Parity Relationship?711
20.5	Optionlike Securities?714
Callable Bonds / Convertible Securities / Warrants / Collateralized Loans / 
Levered Equity and Risky Debt
20.6	Financial Engineering?720
20.7	Exotic Options?721
Asian Options / Barrier Options / Lookback Options / Currency-Traded Options / 
Digital Options
Summary?724
Key Terms?725
Web Sites?725
E-Investments: Options and Straddles?725
Standard & Poor?s?726
Problems?726
Solutions to Concept Checks?731
CHAPTER 21
OPTION VALUATION
21.1	Option Valuation: Introduction?737
Intrinsic and Time Values / Determinants of Option Values
21.2	Restrictions on Option Values?740
Restrictions on the Value of a Call Option / Early Exercise and Dividends / 
Early Exercise of American Puts
21.3	Binomial Option Pricing?744
Two-State Option Pricing / Generalizing the Two-State Approach
21.4	Black-Scholes Option Valuation?750
The Black-Scholes Formula / Dividends and Call Option Valuation / Put Option 
Valuation
21.5	Using the Black-Scholes Formula?760
Hedge Ratios and the Black-Scholes Formula / Portfolio Insurance / Hedging Bets 
on Mispriced Options
21.6	Empirical Evidence on Option Pricing?770
Summary?771
Key Terms?772
Web Sites?772
E-Investments: Option Price Differences?773
Standard & Poor?s?773
Problems?773
Solutions to Concept Checks?780
CHAPTER 22
FUTURES MARKETS
22.1	The Futures Contract?784
The Basics of Futures Contracts / Existing Contracts
22.2	Mechanics of Trading in Futures Markets?789
The Clearinghouse and Open Interest / The Margin Account and Marking to Market / 
Cash versus Actual 
Delivery / Regulations / Taxation
22.3	Futures Markets Strategies?795
Hedging and Speculation / Basis Risk and Hedging
22.4	The Determination of Futures Prices?799
The Spot-Futures Parity Theorem / Spreads / Forward versus Futures Pricing
22.5	Futures Prices versus Expected Spot Prices?805
Expectation Hypothesis / Normal Backwardation / Contango / Modern Portfolio 
Theory
Summary?807
Key Terms?808
Web Sites?808
E-Investments: Contract Specifications for Financial Futures and Options?809
Standard & Poor?s?809
Problems?809
Solutions to Concept Checks?812
CHAPTER 23
FUTURES AND SWAPS: MARKETS AND APPLICATIONS
23.1	Foreign Exchange Futures?813
The Markets
Interest Rate Parity / Direct versus Indirect Quotes / Using Futures to Manage 
Exchange Rate Risk
23.2	Stock-Index Futures?821
The Contracts / Creating Synthetic Stock Positions: An Asset Allocation Tool / 
Index Arbitrage / Using Index 
Futures to Hedge Market Risk
23.3	Interest Rate Futures?827
Hedging Interest Rate Risk
23.4	Hedging and Hedge Funds?829
23.5	Swaps?831
Swaps and Balance Sheet Restructuring / The Swap Dealer / Other Interest Rate 
Contracts / Swap Pricing / 
Credit Risk in the Swap Market
23.6	Commodity Futures Pricing?837
Pricing with Storage Costs / Discounted Cash Flow Analysis for Commodity Futures
Summary?841
Key Terms?842
Web Sites?842
E-Investments: Equity Swaps?843
Standard & Poor?s?843
Problems?843
Solutions to Concept Checks?849
Part VII
APPLIED PORTFOLIO MANAGEMENT
CHAPTER 24
PORTFOLIO PERFORMANCE EVALUATION
24.1	The Conventional Theory of Performance Evaluation?851
Average Rates of Return / Time-Weighted Returns versus Dollar-Weighted Returns / 
Adjusting Returns for 
Risk / The M2 Measure of Performance / Sharpe?s Measure as the Criterion for 
Overall Portfolios / 
Appropriate Performance Measures in Three Scenarios
Jane?s Portfolio Represents Her Entire Risky Investment Fund / Jane?s Choice 
Portfolio Is One of Many 
Portfolios Combined into a Large Investment Fund
The Role of Alpha in Performance Measures / Actual Performance Measurement: An 
Example / Realized 
Returns versus Expected Returns
24.2	Performance Measurement for Hedge Funds?863
24.3	Performance Measurement with Changing Portfolio Composition?867
24.4	Market Timing?868
The Potential Value of Market Timing / Valuing Market Timing as a Call Option / 
The Value of Imperfect 
Forecasting
24.5	Style Analysis?875
24.6	Morningstar?s Risk-Adjusted Rating?879
24.7	Evaluating Performance Evaluation?879
24.8	Performance Attribution Procedures?881
Asset Allocation Decisions / Sector and Security Selection Decisions / Summing 
Up Component 
Contributions
Summary?887
Key Terms?887
Web Sites?887
E-Investments: Performance of Mutual Funds?888
Standard & Poor?s?888
Problems?888
Solutions to Concept Checks?895
CHAPTER 25
INTERNATIONAL DIVERSIFICATION
25.1	Global Markets for Equities?898
Developed Countries / Emerging Markets / Market Capitalization and GDP / Home-
Country Bias
25.2	Risk Factors in International Investing?902
Exchange Rate Risk / Country-Specific Risk
25.3	International Investing: Risk, Return, and Benefits from 
Diversification?908
Risk and Return: Summary Statistics / Are Investments in Emerging Markets 
Riskier? / Are Average Returns 
in Emerging Markets Greater? / Benefits from International Diversification / 
Misleading Representation of 
Diversification Benefits / Realistic Benefits from International Diversification 
/ Are Benefits from 
International Diversification Preserved in Bear Markets?
25.4	Assessing the Potential of International Diversification?918
The Home Bias / The Pursuit of Efficient Diversification / Diversification 
Benefits over Time / Active 
Investors
25.5	International Investing and Performance Attribution?922
Constructing a Benchmark Portfolio of Foreign Assets / Performance Attribution
Summary?926
Key Terms?926
Web Sites?926
E-Investments: International Diversification?927
Standard & Poor?s?927
Problems?927
Solutions to Concept Checks?930
Chapter 26
Hedge Funds
26.1	Hedge Funds versus Mutual Funds
26.2	Hedge Fund Strategies
Directional and Nondirectional Strategies / Statistical Arbitrage 
26.3	Portable Alpha
An Example of a Pure Play 
26.4	Style Analysis for Hedge Funds
26.5	Performance Measurement for Hedge Funds
Liquidity and Hedge Fund Performance / Hedge Fund Performance and Survivorship 
Bias / Hedge Fund 
Performance and Changing Factor Loadings / Black Swans and Hedge Fund 
Performance
26.6	Fee Structure in Hedge Funds
Summary
Key Terms
Problems Sets
E-Investments: TITLE TO COME!!!!! 
Solutions to Concept Checks
CHAPTER 27
THE THEORY OF ACTIVE PORTFOLIO MANAGEMENT
27.1	Optimal Portfolios and Alpha Values?975
Forecasts of Alpha Values and Extreme Portfolio Weights / Restriction of 
Benchmark Risk
27.2	The Treynor-Black Model and Forecast Precision?982
Adjusting Forecasts for the Precision of Alpha / Distribution of Alpha Values / 
Organizational Structure and 
Performance
27.3	The Black-Litterman Model?986
A Simple Asset Allocation Decision / Step 1: The Covariance Matrix from 
Historical Data / Step 2: 
Determination of a Baseline Forecast / Step 3: Integrating the Manager?s Private 
Views / Step 4: Revised 
(Posterior) Expectations / Step 5: Portfolio Optimization
27.4	Treynor-Black versus Black-Litterman: Complements, not Substitutes?991
The BL Model as Icing on the TB Cake / Why Not Replace the Entire TB Cake with 
the BL Icing?
27.5	The Value of Active Management?994
A Model for the Estimation of Potential Fees / Results from the Distribution of 
Actual Information Ratios / 
Results from Distribution of Actual Forecasts / Results with Reasonable 
Forecasting Records
27.6	Concluding Remarks?997
Summary?998
Key Terms?998
Problems?998
Appendix: The General Black-Litterman Model?998
CHAPTER 28
INVESTMENT POLICY AND THE FRAMEWORK OF THE CFA INSTITUTE
28.1	Making Investment Decisions?934
Objectives / Individual Investors / Personal Trusts / Mutual Funds / Pension 
Funds / Endowment Funds / Life 
Insurance Companies / Non?Life Insurance Companies / Banks
28.2	Constraints?937
Liquidity / Investment Horizon / Regulations / Tax Considerations / Unique Needs
28.3	Asset Allocation?940
Policy Statements / Taxes and Asset Allocation
28.4	Managing Portfolios of Individual Investors?942
Human Capital and Insurance / Investment in Residence / Saving for Retirement 
and the Assumption of Risk / 
Retirement Planning Models / Manage Your Own Portfolio or Rely on Others? / Tax 
Sheltering
The Tax-Deferral Option / Tax-Deferred Retirement Plans / Deferred Annuities / 
Variable and Universal 
Life Insurance
28.5	Pension Funds?948
Defined Contribution Plans / Defined Benefit Plans / Alternative Perspectives on 
Defined Benefit Pension 
Obligations / Pension Investment Strategies
Investing in Equities / Wrong Reasons to Invest in Equities
28.6	Investments for the Long Run?953
Advice from the Mutual Fund Industry / Target Investing and the Term Structure 
of Bonds / Making Simple 
Investment Choices / Framing the Term Structure of Risk with Options
Summary?957
Key Terms?958
Web Sites?958
E-Investments: Personal Diversification?958
Problems?959
Solutions to Concept Checks?967
Appendix: A Spreadsheet Model for Long-Term Investing?968
Solutions to Concept Checks?973
APPENDIX?References to CFA Problems?A-1
GLOSSARY?G-1
NAME INDEX?IND-1
SUBJECT INDEX?IND-4

Library of Congress Subject Headings for this publication:

Investments.
Portfolio management.