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Fundamentals of Investments: Valuation and Management Edition 7 by Bradford Jordan EBOOK PDF Instant Download

Table of Contents

About the Authors

Preface

Part One. Introduction

Chapter 1. A Brief History of Risk and Return

1.1. Returns

Dollar Returns

Percentage Returns

A Note on Annualizing Returns

1.2. The Historical Record

A First Look

A Longer Range Look

A Closer Look

2008: The Bear Growled and Investors Howled

1.3. Average Returns: The First Lesson

Calculating Average Returns

Average Returns: The Historical Record

Risk Premiums

The First Lesson

1.4. Return Variability: The Second Lesson

Frequency Distributions and Variability

The Historical Variance and Standard Deviation

The Historical Record

Normal Distribution

The Second Lesson

1.5. More on Average Returns

Arithmetic versus Geometric Averages

Calculating Geometric Average Returns

Arithmetic Average Return or Geometric Average Return?

Dollar-Weighted Average Returns

1.6. Risk and Return

The Risk-Return Trade-Off

A Look Ahead

1.7. Summary and Conclusions

Chapter 2. The Investment Process

2.1. The Investment Policy Statement

Objectives: Risk and Return

Investor Constraints

Strategies and Policies

2.2. Investment Professionals

Choosing a Broker/Advisor

Online Brokers

Investor Protection

Broker–Customer Relations

2.3. Types of Accounts

Cash Accounts

Margin Accounts

Annualizing Returns on a Margin Purchase

Hypothecation and Street Name Registration

Retirement Accounts

2.4. Types of Positions

Basics of a Short Sale

Short Sales: Some Details

Short-Sale Constraints

2.5. Forming an Investment Portfolio

Some Risk Tolerance Scores

Risk and Return

Investor Constraints

Strategies and Policies

More on Asset Allocation

REITs

2.6. Summary and Conclusions

Chapter 3. Overview of Security Types

3.1. Classifying Securities

3.2. Interest-Bearing Assets

Money Market Instruments

Fixed-Income Securities

3.3. Equities

Common Stock

Preferred Stock

Common Stock Price Quotes

3.4. Derivatives

Futures Contracts

Futures Price Quotes

Gains and Losses on Futures Contracts

3.5. Option Contracts

Option Terminology

Options versus Futures

Option Price Quotes

Gains and Losses on Option Contracts

Investing in Stocks versus Options

3.6. Summary and Conclusions

Chapter 4. Mutual Funds and Other Investment Companies

4.1. Advantages and Drawbacks of Mutual Fund Investing

Advantages

Drawbacks

4.2. Investment Companies and Fund Types

Open-End versus Closed-End Funds

Net Asset Value

4.3. Mutual Fund Operations

Mutual Fund Organization and Creation

Taxation of Investment Companies

The Fund Prospectus and Annual Report

4.4. Mutual Fund Costs and Fees

Types of Expenses and Fees

Expense Reporting

Why Pay Loads and Fees?

4.5. Short-Term Funds

Money Market Mutual Funds

Money Market Deposit Accounts

4.6. Long-Term Funds

Stock Funds

Taxable and Municipal Bond Funds

Stock and Bond Funds

Mutual Fund Objectives: Recent Developments

4.7. Mutual Fund Performance

Mutual Fund Performance Information

How Useful Are Fund Performance Ratings?

4.8. Closed-End Funds, Exchange-Traded Funds, and Hedge Funds

Closed-End Funds Performance Information

The Closed-End Fund Discount Mystery

Exchange-Traded Funds

Hedge Funds

4.9. Summary and Conclusions

Part Two. Stock Markets

Chapter 5. The Stock Market

5.1. Private Equity versus Selling Securities to the Public

Private Equity

The Structure of Private Equity Funds

Types of Private Equity Funds

Selling Securities to the Public

The Primary Market for Common Stock

The Secondary Market for Common Stock

Dealers and Brokers

5.2. The New York Stock Exchange

NYSE Membership History

Designated Market Makers

Other NYSE Participants

The NYSE Hybrid Market

NYSE-Listed Stocks

5.3. Operation of the New York Stock Exchange

NYSE Floor Activity

Special Order Types

5.4. NASDAQ

NASDAQ Operations

NASDAQ Participants

5.5. NYSE and NASDAQ Competitors

5.6. Stock Market Information

The Dow Jones Industrial Average

Stock Market Indexes

More on Price-Weighted Indexes

The Dow Jones Divisors

More on Index Formation: Base-Year Values

5.7. Summary and Conclusions

Chapter 6. Common Stock Valuation

6.1. Security Analysis: Be Careful Out There

6.2. The Dividend Discount Model

Constant Perpetual Growth

Historical Growth Rates

The Sustainable Growth Rate

Analyzing ROE

6.3. The Two-Stage Dividend Growth Model

Nonconstant Growth in the First Stage

The H-Model

Discount Rates for Dividend Discount Models

Observations on Dividend Discount Models

6.4. The Residual Income Model

Residual Income

The RIM versus the Constant Growth DDM

6.5. The Free Cash Flow Model

Free Cash Flow

The FCF Model versus the Constant Growth DDM

6.6. Price Ratio Analysis

Price-Earnings Ratios

Price-Cash Flow Ratios

Price-Sales Ratios

Price-Book Ratios

Applications of Price Ratio Analysis

Enterprise Value Ratios

6.7. An Analysis of the Procter & Gamble Company

Using the Dividend Discount Model

Using the Residual Income Model

Using Price Ratio Analysis

6.8. Summary and Conclusions

Chapter 7. Stock Price Behavior and Market Efficiency

7.1. Introduction to Market Efficiency

7.2. What Does “Beat the Market” Mean?

7.3. Foundations of Market Efficiency

7.4. Forms of Market Efficiency

7.5. Why Would a Market Be Efficient?

7.6. Some Implications of Market Efficiency

Does Old Information Help Predict Future Stock Prices?

Random Walks and Stock Prices

How Does New Information Get into Stock Prices?

Event Studies

7.7. Informed Traders and Insider Trading

Informed Trading

Insider Trading

7.8. How Efficient Are Markets?

Are Financial Markets Efficient?

Some Implications of Market Efficiency

7.9. Market Efficiency and the Performance of Professional Money Managers

7.10. Anomalies

The Day-of-the-Week Effect

The Amazing January Effect

Turn-of-the-Year Effect

Turn-of-the-Month Effect

The Earnings Announcement Puzzle

The Price-Earnings (P/E) Puzzle

7.11. Bubbles and Crashes

The Crash of 1929

The Crash of October 1987

The Asian Crash

The “Dot-Com” Bubble and Crash

The Crash of October 2008

7.12. Summary and Conclusions

Chapter 8. Behavioral Finance and the Psychology of Investing

8.1. Introduction to Behavioral Finance

8.2. Prospect Theory

Frame Dependence

Loss Aversion

Mental Accounting and House Money

8.3. Overconfidence

Overconfidence and Trading Frequency

Overtrading and Gender: “It’s (Basically) a Guy Thing”

What Is a Diversified Portfolio to the Everyday Investor?

Illusion of Knowledge

Snakebite Effect

8.4. Misperceiving Randomness and Overreacting to Chance Events

The “Hot-Hand” Fallacy

The Gambler’s Fallacy

8.5. More on Behavioral Finance

Heuristics

Herding

How Do We Overcome Bias?

8.6. Sentiment-Based Risk and Limits to Arbitrage

Limits to Arbitrage

The 3Com/Palm Mispricing

The Royal Dutch/Shell Price Ratio

8.7. Technical Analysis

Why Does Technical Analysis Continue to Thrive?

Dow Theory

Elliott Waves

Support and Resistance Levels

Technical Indicators

Relative Strength Charts

Charting

Fibonacci Numbers

Other Technical Indicators

8.8. Summary and Conclusions

Part Three. Interest Rates and Bond Valuation

Chapter 9. Interest Rates

9.1. Interest Rate History and Money Market Rates

Interest Rate History

Money Market Rates

9.2. Money Market Prices and Rates

Bank Discount Rate Quotes

Treasury Bill Quotes

Bank Discount Yields versus Bond Equivalent Yields

Bond Equivalent Yields, APRs, and EARs

9.3. Rates and Yields on Fixed-Income Securities

The Treasury Yield Curve

Rates on Other Fixed-Income Investments

9.4. The Term Structure of Interest Rates

Treasury STRIPS

Yields for U.S. Treasury STRIPS

9.5. Nominal versus Real Interest Rates

Real Interest Rates

The Fisher Hypothesis

Inflation-Indexed Treasury Securities

9.6. Traditional Theories of the Term Structure

Expectations Theory

Maturity Preference Theory

Market Segmentation Theory

9.7. Determinants of Nominal Interest Rates: A Modern Perspective

Problems with Traditional Theories

Modern Term Structure Theory

Liquidity and Default Risk

9.8. Summary and Conclusions

Chapter 10. Bond Prices and Yields

10.1. Bond Basics

Straight Bonds

Coupon Rate and Current Yield

10.2. Straight Bond Prices and Yield to Maturity

Straight Bond Prices

Premium and Discount Bonds

Relationships among Yield Measures

A Note on Bond Price Quotes

10.3. More on Yields

Calculating Yields

Yield to Call

10.4. Interest Rate Risk and Malkiel’s Theorems

Promised Yield and Realized Yield

Interest Rate Risk and Maturity

Malkiel’s Theorems

10.5. Duration

Macaulay Duration

Modified Duration

Calculating Macaulay Duration

Properties of Duration

10.6. Bond Risk Measures Based on Duration

Dollar Value of an 01

Yield Value of a 32nd

10.7. Dedicated Portfolios and Reinvestment Risk

Dedicated Portfolios

Reinvestment Risk

10.8. Immunization

Price Risk versus Reinvestment Rate Risk

Immunization by Duration Matching

Dynamic Immunization

10.9. Summary and Conclusions

Part Four. Portfolio Management

Chapter 11. Diversification and Risky Asset Allocation

11.1. Expected Returns and Variances

Expected Returns

Calculating the Variance of Expected Returns

11.2. Portfolios

Portfolio Weights

Portfolio Expected Returns

Portfolio Variance of Expected Returns

11.3. Diversification and Portfolio Risk

The Effect of Diversification: Another Lesson from Market History

The Principle of Diversification

The Fallacy of Time Diversification

11.4. Correlation and Diversification

Why Diversification Works

Calculating Portfolio Risk

The Importance of Asset Allocation, Part 1

More on Correlation and the Risk-Return Trade-Off

11.5. The Markowitz Efficient Frontier

The Importance of Asset Allocation, Part 2

11.6. Summary and Conclusions

Chapter 12. Return, Risk, and the Security Market Line

12.1. Announcements, Surprises, and Expected Returns

Expected and Unexpected Returns

Announcements and News

12.2. Risk: Systematic and Unsystematic

Systematic and Unsystematic Risk

Systematic and Unsystematic Components of Return

12.3. Diversification, Systematic Risk, and Unsystematic Risk

Diversification and Unsystematic Risk

Diversification and Systematic Risk

12.4. Systematic Risk and Beta

The Systematic Risk Principle

Measuring Systematic Risk

Portfolio Betas

12.5. The Security Market Line

Beta and the Risk Premium

The Reward-to-Risk Ratio

The Basic Argument

The Fundamental Result

The Security Market Line

12.6. More on Beta

A Closer Look at Beta

Where Do Betas Come From?

Another Way to Calculate Beta

Why Do Betas Differ?

12.7. Extending CAPM

A (Very) Brief History of Testing CAPM

The Fama-French Three-Factor Model

12.8. Summary and Conclusions

Chapter 13. Performance Evaluation and Risk Management

13.1. Performance Evaluation

Performance Evaluation Measures

The Sharpe Ratio

The Treynor Ratio

Jensen’s Alpha

Another Method to Calculate Alpha

Information Ratio

R-Squared

13.2. Comparing Performance Measures

Global Investment Performance Standards

Sharpe-Optimal Portfolios

13.3. Investment Risk Management

Value-at-Risk

13.4. More on Computing Value-at-Risk

13.5. Summary and Conclusions

Part Five. Futures and Options

Chapter 14. Futures Contracts

14.1. Futures Contracts Basics

Modern History of Futures Trading

Futures Contract Features

Futures Prices

14.2. Why Futures?

Speculating with Futures

Hedging with Futures

14.3. Futures Trading Accounts

14.4. Cash Prices versus Futures Prices

Cash Prices

Cash-Futures Arbitrage

Spot-Futures Parity

More on Spot-Futures Parity

14.5. Stock Index Futures

Basics of Stock Index Futures

Index Arbitrage

Hedging Stock Market Risk with Futures

Hedging Interest Rate Risk with Futures

Futures Contract Delivery Options

14.6. Summary and Conclusions

Chapter 15. Stock Options

15.1. Options on Common Stocks

Option Basics

Option Price Quotes

15.2. The Options Clearing Corporation

15.3. Why Options?

15.4. Stock Index Options

Index Options: Features and Settlement

Index Option Price Quotes

15.5. Option Intrinsic Value and “Moneyness”

Intrinsic Value for Call Options

Intrinsic Value for Put Options

Time Value

Three Lessons about Intrinsic Value

Show Me the Money

15.6. Option Payoffs and Profits

Option Writing

Option Payoffs

Option Payoff Diagrams

Option Profit Diagrams

15.7. Using Options to Manage Risk

The Protective Put Strategy

Credit Default Swaps

The Protective Put Strategy and Corporate Risk Management

Using Call Options in Corporate Risk Management

15.8. Option Trading Strategies

The Covered Call Strategy

Spreads

Combinations

15.9. Arbitrage and Option Pricing Bounds

The Upper Bound for Call Option Prices

The Upper Bound for Put Option Prices

The Lower Bounds for Call and Put Option Prices

15.10. Put-Call Parity

Put-Call Parity with Dividends

What Can We Do with Put-Call Parity?

15.11. Summary and Conclusions

Part Six. Topics in Investments

Chapter 16. Option Valuation

16.1. A Simple Model to Value Options before Expiration

16.2. The One-Period Binomial Option Pricing Model

The One-Period Binomial Option Pricing Model—The Assumptions

The One-Period Binomial Option Pricing Model—The Setup

The One-Period Binomial Option Pricing Model—The Formula

What Is Delta?

16.3. The Two-Period Binomial Option Pricing Model

Step 1: Build a Price Tree for Stock Prices through Time

Step 2: Use the Intrinsic Value Formula to Calculate the Possible Option Prices at Expiration

Step 3: Calculate the Fractional Share Needed to Form Each Risk-Free Portfolio at the Next-to-Last D

Step 4: Calculate All Possible Option Prices at the Next-to-Last Date

Step 5: Repeat This Process by Working Back to Today

16.4. The Binomial Option Pricing Model with Many Periods

16.5. The Black-Scholes Option Pricing Model

16.6. Varying the Option Price Input Values

Varying the Underlying Stock Price

Varying the Option’s Strike Price

Varying the Time Remaining until Option Expiration

Varying the Volatility of the Stock Price

Varying the Interest Rate

16.7. Measuring the Impact of Stock Price Changes on Option Prices

Interpreting Option Deltas

16.8. Hedging Stock with Stock Options

Hedging Using Call Options—The Prediction

Hedging Using Call Options—The Results

Hedging Using Put Options—The Prediction

Hedging Using Put Options—The Results

16.9. Hedging a Stock Portfolio with Stock Index Options

16.10. Implied Standard Deviations

CBOE Implied Volatilities for Stock Indexes

16.11. Employee Stock Options

ESO Features

ESO Repricing

ESOs at The Gap, Inc.

Valuing Employee Stock Options

16.12. Summary and Conclusions

Chapter 17. Projecting Cash Flow and Earnings

17.1. Sources of Financial Information

17.2. Financial Statements

The Balance Sheet

The Income Statement

The Cash Flow Statement

Performance Ratios and Price Ratios

17.3. Financial Statement Forecasting

The Percentage of Sales Approach

The Pro Forma Income Statement

The Pro Forma Balance Sheet

Scenario One

Scenario Two

Projected Profitability and Price Ratios

17.4. Starbucks Corporation Case Study

Pro Forma Income Statement

Pro Forma Balance Sheet

Valuing Starbucks Using Ratio Analysis

Valuing Starbucks Using a Two-Stage Dividend Growth Model

Valuing Starbucks: What Does the Market Say?

17.5. Summary and Conclusions

Chapter 18. Corporate and Government Bonds

18.1. Corporate Bond Basics

18.2. Corporate Bond Indentures

Bond Seniority Provisions

Call Provisions

Put Provisions

Bond-to-Stock Conversion Provisions

Graphical Analysis of Convertible Bond Prices

Bond Maturity and Principal Payment Provisions

Sinking Fund Provisions

Coupon Payment Provisions

Protective Covenants

Adjustable-Rate Bonds

18.3. Government Bond Basics

18.4. U.S. Treasury Bills, Notes, Bonds, and STRIPS

Treasury Bond and Note Prices

Treasury Inflation-Protected Securities

18.5. U.S. Treasury Auctions

18.6. Federal Government Agency Securities

18.7. Municipal Bonds

Municipal Bond Features

Types of Municipal Bonds

Municipal Bond Insurance

Equivalent Taxable Yield

Taxable Municipal Bonds

18.8. Bond Credit Ratings

Why Bond Ratings Are Important

An Alternative to Bond Ratings

Junk Bonds

18.9. Summary and Conclusions

Chapter 19. Global Economic Activity and Industry Analysis

19.1. Top-Down Analysis

19.2. Global Macroeconomic Activity

Real GDP

Business Cycles

Economic Indicators

The Global Economy and Stock Return Correlations

The Effects of Exchange Rates on Global Investments

19.3. Monitoring Jobs and the Price Level

Labor Market Indicators

The Consumer Price Index

19.4. Monetary and Fiscal Policy

Monetary Policy

Fiscal Policy

19.5. Industry Analysis

Identifying Sectors

Porter’s Five Forces

19.6. Summary and Conclusions

Appendixes

A. Answers to Test Your Investment Quotient Questions

B. Answers to Selected Questions and Problems

C. Key Equations

Name Index

Equations Index

Subject Index