Expense ratio, 559 External (informational) efficiency, in a good market, 93

Transcription

1 INDEX A Accounting change announcements, semistrong-form EMH, Accrued interest, bonds, 621 Accumulation phase, investor life cycle, Active equity portfolio management. See Equity portfolio management; Portfolio management Actuarial rate of return, 56 Aggregate market analysis, with efficient capital markets, 173 Aggregate profit margin, estimation of, Alternative asset classes, Alternative bonds, 14 Alternative industries, structural economic changes and, Alternative investments, historical risk-returns, Alternative trading systems (ATSs), Altman Z-score model, credit analysis, American Depository Receipts (ADRs), 74 American options, 733 American Research and Development Corporation (ARD), 919 American shares, 74 American Stock Exchange (AMX), 78, information on bond prices, AMEX. See American Stock Exchange (AMX) Analysis effect, portfolio return, , 1013 Anchoring bias, 170 Antiques, 79, Arbitrage, 728 stock index, 782, Arbitrage pricing theory (APT), See also Multifactor models alternative test techniques, comparing CAPM, 240 empirical tests, security valuation with, using, Arithmetic mean (AM), 7 9 Art, 79, Asset allocation cultural differences, importance in the policy statement, insured, 572 integrated, investment company portfolio objectives, 902 selecting an active method, 572 strategic, 570 strategies, tactical, Asset-backed securities (ABSs), Asset-liability management, 697 Asset management alternative asset classes, breakdown by fund characteristics, ethical conflicts, ethics and regulation, incentive compensation schemes, 928 marketing investment management services, soft dollar arrangements, 928 hedge fund investing, industry regulation, structure and evolution, principal securities laws, 925 private management and advisory firms, investment strategy, standards for ethical behavior, Asset manager, professional functions, Asset pricing models. See Arbitrage pricing theory (APT); Capital asset pricing model (CAPM) Assets correlations between returns, 82 different classes, return and systematic risk, return and total risk, Assets under management (AUM), Auction-rate securities, 596 Autocorrelation tests, of independence in EHM, 154 Automatic adjustment, value-weighted index, 131 Automobile insurance, 32 B Backwardated, 772 Balanced funds, 77, Balance sheet, , 302 common size, 273 high-quality, 302 proportion of debt ratios, Bankruptcy, prediction of, 305 Banks, Bar charting, 530 Barclay s Global Investors (BGI), BARRA, characteristic-based risk factor models, Basis, 43 defining, 768 hedging and, Basis risk, Bearer bond, 580 Behavioral finance, explaining biases, fusion investing, 171 insights, 176 Belief perseverance bias, 170 Benchmark error, 229, 1014 Benchmark portfolio, 37, 994 Benchmarks aggregate stock- or bond-market index, 128 bond, 99 Best-effort basis, 96 Best Execution and Portfolio Performance (Jost), 92 Biases, Binomial option pricing model, forecasting price changes, generalizing the model, Black-Scholes valuation model, other extensions of, 826 problems, properties, The Blue List of Current Municipal Offerings, 606 Bond funds, 899, Bond ladder, 680 Bond market line, Bond markets indexes, correlations with monthly, secondary, secondary corporate, 98 technical analysis, Bond portfolio management, active, credit analysis, global bond investing, implementing an active bond transaction, interest rate anticipation, valuation analysis, 685 yield spread analysis, contingent and structured management strategies, contingent immunization, core-plus management strategies, matched-funding management strategies,

2 1030 INDEX Bond portfolio management (Continued) dedicated portfolios, horizon matching, immunization techniques, passive, bond indexing in practice, buy-and-hold strategy, indexing strategy, 681 performance, style, and strategy, rebalancing, Bond ratings, estimating, 304 Bonds. See also specific bonds alternative, 14 alternative issues, 587 basic features, calculating future prices, callable, duration and convexity for, characteristics, impact on interest rate, collateral trust, 71 commodity-linked bull and bear, computing yields, convertible, 72, convexity, corporate, 71 72, dual currency, features affecting maturity, general obligation (GOs), government, 94 government agency issues, high-yield, 77 income, 72 indenture provisions, 581 interest rate determination, international, 73, 601 international domestic, 73 interpreting quotes, intrinsic features, 580 junk, 77 mortgage, 71 municipal, 70 71, 94, obtaining information on prices, participating investors, 585 price and yield determination on noninterest dates, price volatility for, modified duration and, 643, promised yield to maturity, putable, 659 rates of return on, 582 ratings, secured, 71 subordinated, 71 tax-exempt, 621 term-structure theories, treasury, 94 types of issues, valuation of, yield books, Bond swaps pure yield pickup, substitution, Bond valuation. See also Valuation calculating future bond prices, fundamentals, present value model, using spot rates, Book value (BV), 162 Book value/market value (BV/MV) ratio, 162 Borrowing rates, CML, Breadth of market measures, Brinson Partner Global Security Market Index (GSMI), 142 Broker, 96 Buffett, Warren, tenets, Business cycle consumer sentiment and, 413 industry sectors and, inflation and, 412 interest rates and, 413 international economics and, 413 risk, 248 stock market and, Business risk, 17, , relationship to financial risk, Buy-and-hold strategy, bond portfolio management, Buyouts, private equity transaction, C Calendar effects, return prediction studies, Call markets, Call option, 75, , 732, , 873 Call premium, 581 Call provisions, 71 Candlestick charts, 530 Capacity utilization rate, effect on aggregate profit margin, 384 Cap agreements, Capital appreciation, 39 Capital asset pricing model (CAPM), 205, See also Arbitrage pricing theory (APT); Capital market theory additional empirical tests, calculating systematic risk, comparing arbitrage pricing theory (APT), 238 conceptual development, multifactor models of risk and return, security market line, summary of risk-return empirical results, 228 Capital gain component, determination of, Capital gains realized, 43 unrealized, 43 Capital market instruments, Capital market line (CML), differential borrowing and lending rates, hedge fund performance, heterogeneous expectations and planning periods, investing with, risk measure for, risk-return possibilities with leverage, separation theorem and, 212 transaction costs, 224 zero-beta model, Capital markets alternative efficient market hypotheses, changes in conditions, conditions in, 16 efficient, Capital market theory, See also Capital asset pricing model (CAPM) background, development, risk, diversification and the market portfolio, Capital preservation, 39 Cash flow alternative measures, coverage ratios, financing activities, free, 270 investing activities, 268 measures of, 271 operating activities, 268 operating free, outstanding debt ratios, statement of, traditional, 270 valuation theory, 323 Cash ratio, liquidity measure, Cash reserves, 32 CDs. See Certificates of deposit Center for International Business Conditions Research (CIBCR), 362 Center for Research in Security Prices (CRSP), 247 Certificates for automobile receivables (CARs), 596 Certificates of deposit (CDs), as a fixedincome investment, 70 Change in wealth, 5 Character-based risk factor models, extensions of, Characteristic line calculating systematic risk, 219 computing of, Characteristic selectivity (CS) performance measure, 962 Chartered Financial Analysis (CFA) Institute, 926 Chicago Board of Trade (CBOT), 76 Chicago Board Options Exchange (CBOE), put-call ratio, 524 Chicago Mercantile Exchange (CME), 76 Chooser options,

3 INDEX 1031 Closed-end investment companies, Coefficient of variation, 13, 29 Coincident indicators, 359 Coins and stamps, Collar agreement, 755, Collateralized debt obligations (CDOs), 597 Collateralized mortgage obligations (CMOs), 595 Collateral trust bonds, 594 Combined country investments, Commingling of investment capital, 893 Commingled Real Estate Funds (CREFs), 84 Commission brokers, 108 Commodity-linked bull and bear bonds, Common effect, 17 Common size income statement, 273, 281 Common size statements, Common stock, approaches to valuation, classifications, empirical duration for, funds, 77 Company analysis analyst conflicts of interest, 505 economic, industry, and structural links, estimating earnings per share, estimating intrinsic value, , 486 firm competitive strategies, focusing a strategy, global company and stock analysis, influences on analysts, internal performance, lessons from Peter Lynch, 460 quarterly estimates, 478 site visits and interviewing, 503 versus stock valuation, SWOT analysis, tenets of Warren Buffett, value-added measures, when to sell, Company earnings multiplier macroanalysis, 480 microanalysis, 480 Walgreen Co. s, 481 Comparative analysis internal liquidity, 299 ratios, Competition, in industry analysis, Competitive bid sales, 94 Competitive environment, 417 Competitive strategy, 417 company analysis and, Walgreen Co. s, Completely diversified portfolio, 211 Completeness funds, portfolio construction technique, 542 Composite leading indicator index, Composite stock-bond indexes, Computer-Assisted Execution System (CAES), 117 Confidence index, 525 Confidence risk, 248 Confirmation bias, 171 Consistent investor actions, 637 Consolidated Quotation System (CQS), 116 Consolidation phase, investor life cycle, 34 Construction and development trusts, 78 Consumer Price Index for All Urban Consumers (CPI-U), 587 Consumer sentiment, business cycle and, 413 Contango, 772 Contingent, deferred sales loads, 901 Continuous market, Contract price, forward, 729 Contrarian investment, 552 Contrary opinion rules, Convenience yield, 772 Conversion factors, 774 Conversion parity price, bonds, 867 Conversion premium, preferred stock, 866 Conversion ratio bonds, 867 preferred stock, 866 Conversion value, preferred stock, 866 Convertible bonds, Convertible preferred stock, 866 Convertible securities, 865 Convexity, callable bonds, computation of, desirability, determinants, modified-duration-convexity effects, percent five-year bond selling to yield 6 percent, 675 price-yield relationship for bonds, Core-plus management strategies, bond portfolio management, Corporate bonds, 584, interpreting quotes, Corporate events, semistrong-form EMH, 166 Corporate insider trading, strong-form EMH, Corporate profits, alternative estimates, 382 Corporate stocks, Correlation coefficient, Cost of carry, relationship between spot and forward prices, Cost of equity, 327, 491 Counterparties, 729 Country (political) risk, 19, 419, 506 Coupon, bond price volatility determination, Coupon reinvestment risk, bond portfolio management, 699 Covariance, definition, 89 Covariance and correlation, portfolio analysis, Covariance of returns, portfolio analysis, Covered interest arbitrage, Credit analysis, high-yield (junk) bonds, investing in defaulted debt, 687 models, Credit balances, brokerage accounts, 523 Credit card receivables, 596 Credit default swap, 862 Credit-related swaps, Crossover price, 616 Cross-sectional returns, semistrong-form EMH, Currency, differences, 506 Currency forwards, Currency futures, calculating an application, Currency transactions interest rate parity and covered interest arbitrage, mechanics of, Current consumption, 4 Current income, 39 Current ratio, liquidity measure, 275 Current yield, 613 Cushion bond, 684 Cushion spread, 709 Cyclical changes, 411 Cyclical companies, 455 Cyclical stocks, 455 Cyclic indicator approach, analytical measures of performance, 362 categories, comparison with previous cycles, 362 composite series and ratio of series, leading employment index, 363 limitations, 362 other leading indicator series, surveys of sentiment and expectations, 363 D Dealer market (quote-driven market), 98, 116 Debentures, 71, 580 Debit balances, brokerage accounts, 525 Debt-equity ratio, Decimal pricing, 93 Declining trend channel, 521 Dedication, bond portfolio management, Dedication with reinvestment, 698 Deep discount bonds, zero coupon bonds and, Defensive companies, 455 Defensive competitive strategy, 457 Defensive stocks, 455 Deferred call provision, bond maturity, 581 Defined benefit pension plans, 56 Defined contribution pension plans, 56 57

4 1032 INDEX Depreciation expense estimation of, industry, Derivative investing adjusting put-call-spot parity for dividends, basic nature of, basic payoff and profit diagrams for call and put options, basic payoff and profit diagrams for forward contracts, creating synthetic securities using put-call parity, option profit diagrams, put-call-forward parity, Derivative markets, 727, See also Forward contracts; Futures contracts futures price quotations, interpreting option price quotations, investing with, language and structure of forward and futures markets, language and structure of option markets, Derivatives embedded, commodity-linked bull and bear bonds, dual currency bonds, equity-index linked notes, swap-linked notes, in portfolio management, alternative way to pay for protective put, protecting portfolio value with put options, restructuring asset portfolios with forward contracts, Designated market maker (DMM), 113 specialist, Developed markets around the world, Diamonds, 80 Differentiation strategy, company analysis and, 458 Diffusion indexes, 362 Direction of change approach, earnings multiplier, 396 Display Book, NYSE, 115 Diversification elimination of unsystematic risk and, market portfolio, measurement of, 211 Dividend-bearing securities, valuing options on, Dividend discount model (DDM), derivation of, infinite period, present value of dividends, valuation model, reduced form, 419 Dividend growth rate, Dividend-payout ratio earnings multiplier, 480 estimation of, industry multiplier, 439 Dividends discount calculations, 425 estimating growth for foreign stock, estimating growth rate, 393 growth rate estimates, measure of cash flow, 327 present value of, Domestic diversification, 67 Dow Jones Industrial Average (DJIA), 36 industry groups, 409 price-weighted index, Dow Jones World Stock Index, 136 Dow Theory, Dreyfus Appreciation Fund (DGAGX), Dual currency bonds, DuPont System, extended, Duration for callable bonds, closed-form equation for calculation, effective, 643, empirical, 643, Macaulay, , measures, modified, 643, , option-adjusted or call-adjusted, percent five-year bond selling to yield 6 percent, 675 Dynamic true growth model, 495 E EAFE index, 77, 250 Earnings momentum, , 556 Earnings multiplier, , comparing dividend payout rates, 480 computation of, 486 determinants of, 393 estimation of, , expected growth rate, 484 industry analysis, required rate of return, 480 retail industry, 422 Earnings per share, estimating, 428, forecasting, 432 Earnings retention rate, 421 EBITDA (earnings before interest, taxes, depreciation, and amortization), , 922 Economic news, semistrong-form EMH, 165 Economic series, stock prices and, 359 Economic value added (EVA), MVA relationship, 498 Economy company analysis and, 456 cyclical indicator approach, effects on interest rates, inflation, interest rates, and security prices, monetary policy, 364 monetary variables, 363 money supply and, security markets and, Effective duration, 643, greater than maturity, 659 putable bonds, 659 Efficient frontier, investor utility and, 199 Efficient market hypothesis (EMH), 151 alternative, company analysis, 504 fundamental analysis and, implications of, index funds and exchange-traded funds, 176 portfolio management and, semistrong-form, 153 strong-form, technical analysis and, 172, 520 tests and results, weak-form, 153 Electronic Communication Networks (ECNs), Electronic Crossing Systems (ECSs), 108 Embedded option, bonds with, 652 Empirical duration, 643, common stock, Employees Retirement Income Security Act of 1974 (ERISA), Ending-wealth value, 614 Endowment funds, 57 Equipment trust certificates, 71, 594 Equity collars, 752. See also Collar agreement Equity-index linked notes, Equity instruments, special, Equity-market indexes, price change correlations, 142 Equity options, Equity portfolio management, See also Portfolio management active, anomalies and attributes, fundamental strategies, momentum-based stock portfolios, tax efficiency and active equity management, technical strategies, asset allocation strategies, passive, index portfolio construction techniques, methods of index portfolio investing, tracking error and index portfolio construction,

5 INDEX 1033 passive versus active, style analysis, value versus growth investing, Equity risk premium, current estimate, Equity swaps, Equity trusts, 78 Equity turnover, ERISA. See Employee Retirement and Income Security Act Escalation bias, 171 Eurobond, 73 Eurodollar futures contract, mechanics, European options, 733 Eurozone corporate bond market, government agency bonds, 592 international bonds, 601 sovereign bond market, 589 Event studies, semistrong-form EMH, 157, Excess (pure) profits, 491 Excess return form, 246 Exchange clearinghouse, 764 Exchange listing, semistrong-form EMH, 165 Exchange market makers, Exchange markets, future trading techniques and exchange mergers, innovations for competition, membership, 108 new trading systems, 115 types of orders, Exchange rate risk, 18, 420 Exchange-traded funds (ETFs), 75, 78, 128, rational use in efficient capital markets, 176 Expansion model, 494 Expectations hypothesis, Expected earnings per share, Expected growth rate, based on history, breakdown of ROE, calculation of, dividends for foreign stocks, earnings multiplier, 484 estimation of, 421 fundamentals, Expected rate of inflation, Expected rates of return calculating, 9 11 estimation, 5 individual investment, 183 industry estimates, 439 measuring the risk, portfolio of investments, relative measure of risk, 13 risk-free asset plus risky portfolio, 207 risky asset, 216 standard deviation, 13 variance for, 12 Expense ratio, 559 External (informational) efficiency, in a good market, 93 F Fair game model, 153 Fama-French model, four-factor, 250 Fama performance measure, example of, 957 Federal Home Loan Bank (FHLB), 70 Federal Home Loan Mortgage Corporation (Freddie Mac), 591 Federal Housing Administration (FHA), 70 Federal Land Banks (FLBs), 70 Federal National Mortgage Association (FNMA or Fannie Mae), 70 Fidelity s Magellan Fund (FMAGX), , 257 Financial Accounting Standards Board (FASB), 266 Financial forwards, Financial futures, 76, 98, 524, Financial markets, U. S., relative size, 63 Financial ratios. See also specific ratio analysis of, computation of, limitations, 305 relative, specific uses, Financial risk, 18, , 419 Financial statements major, non-u.s., 301 purpose of analysis, 271 quality of, value of analysis, Fixed exchange (FX) rate, 806 Fixed-income investments, style grid, 679 Flat trend channel, 521 Flexible portfolio (asset allocation) funds, 902 Floating-rate note (FRN), 850 Floor agreements, Floor brokers, 108 FNMA. See Federal National Mortgage Association Foreign competition, effect on aggregate profit margin, 385 Foreign currency options, See also Currency Black-Scholes model, Foreign equities, Foreign exchange (FX) transactions, Foreign exchange rates. See also Exchange rate risk technical analysis, Foreign markets, technical analysis, Foreign securities estimating dividend growth, expected growth rates for, expected required return for, Foreign shares, Forward contracts, 729 basic payoff and profit diagrams, basic valuation concepts, comparing futures contracts, 767 futures contracts and, option contract relationship, range (flexible), restructuring with asset portfolios, unwind values, Forward discount, 788 Forward market applications and strategies, currency in, currency quotations, 789 futures markets and, spot markets and, 729 Forward premium, 788 Forward prices, spot price relationship, Forward rate agreements (FRA), Forward rates calculating from spot rate, defined, 633 implied, (k) plans, Franchise factor, Free cash flow to equity (FCFE), 327, , constant growth model, two-stage growth model, Free cash flow to the firm (FCFF), Freely callable provision, bond maturity, 581 FT/S&P-Actuaries World Indexes, 134 Full replication, portfolio construction technique, 542 Fundamental analysis. See also Technical analysis EMH, Fundamental risk, versus systematic risk, 20 Fusion investing, 171 Future consumption, 4 Futures contracts, 76, basic valuation concepts, comparing forward contracts, 767 Eurodollar contract mechanics, forward contracts and, long-term interest rate, market to market, 763 mechanics, options on, , 828 short-term interest rate, stock index fundamentals, Treasury applications, unwind values, Futures market applications and strategies, currency in, forward markets and, Futures price quotations,

6 1034 INDEX G Generally accepted accounting principles (GAAP), 266 General obligation bonds (GOs), 592 Geometric mean (GM), 7 9 Gifting phase, investor life cycle, 34 Global bond market active investing: example, portfolio risk, returns, 64 structure, participating issuers, Global capital market, total investable assets in, 63 Global equity indexes, Global equity market portfolio risk, returns, 64 Global funds, 905 Global government bond indexes, 139 Global industry analysis, Global investments case for, choices, Global mutual funds, 75 GM. See Geometric mean GNMA. See Government National Mortgage Association GOs. See General obligations bonds Government associated organizations, Japanese bonds, 591, 600 Government bonds, 94 Government National Mortgage Association (GNMA or Ginnie Mae), 70 Grinblatt-Titman performance measure, Gross domestic product, estimation of, 380 Gross profit margin, 280 Growth companies actual returns above required returns, alternative growth models, 492 analysis, definition, 491 growth stocks and, , 492 infinite period DDM and, long-run growth models, no-growth firm, in the real world, Growth duration model, Growth potential analysis, comparative, determinants, importance, 297 Growth stocks, growth companies and, 492 H Harbor Capital Appreciation (HACAX) mutual fund, Health insurance, 32 Hedge funds, characteristics, performance, risk arbitrage investing, strategies, Hedge ratio, 763 calculation of, Hedge transaction, Hedging basis and, calculating the optimal hedge ratio, duration-based approach to, forwards and futures, future funding commitment, 776 understanding basis risk, Hedging pressure theory, 638 High-yield bonds, credit analysis, indexes, 139 High yield/emerging market bonds, Historical rates of return, 5 7 realized, 9 risk measures for, HML (high minus low), 248 Holding period, 5 Holding period return (HPR), 5 Holding period yield (HPY), 6 computation of, 9 Home or rental insurance, 32 Horizon matching, Horizon (realized) yield, differential reinvestment rates, I IMF World Economic Outlook, 343 Immunization another view, bond portfolio management, classical, , 709 contingent, interest rate risk and, 699 mechanics, monitoring the immunized portfolio, portfolio rebalancing and, Income bonds, 72 Income statement, 267 common size, 273 high-quality earnings, 302 Income taxes. See Taxes Indenture, 71 Indenture provisions, bonds, 581 Index, definition, 128 Index funds, 77, 128 rational use in efficient capital markets, 176 Indexing strategy bond portfolio management, 681 enhanced, 696 Index mutual funds, Indicator series, definition, 128 Individual Retirement Account (IRA), regular versus Roth, 46 Industry definition, 450 influence on company analysis, 456 Industry analysis, characteristics to study, 450 competition, cross-sectional performance, demographics, 413 differences in risk, 410 earnings estimate example, earnings multiple technique, with efficient capital markets, factors in, global, insights on industry ROAs, life cycle, lifestyles, 414 performance of companies within an industry, performance over time, 409 politics and regulations in, preparation of, process, rates of return, valuation with free cash flow to equity (FCFE) model, valuation with reduced form DDM, relative valuation approach, research, 410 sources of information, 451 technology, 414 Industry-economy relationship, Industry multiplier, comparing dividend-payout rates, 439 comparing expected growth rate, 439 comparing required rates of return, 439 macroanalysis, versus market multiplier, 439 microanalysis, value and rate of return, Inflation business cycle and, 412 effect on aggregate profit margin, effects on investments, expected, 23 expected rate, interest rates and, Inflation rate, foreign securities, 344 Inflation risk, 248 Informationally efficient market, 152 Initial public offerings (IPOs), 95 semistrong-form EMH, Input-output analysis, industry, 428 Insolvency, prediction of, 305 The Institutional Investor, 407 Institutional investors, Institutional theory, 638

7 INDEX 1035 Insurance, 32 Insurance companies, Insured asset allocation, 572 Integrated asset allocation, Interest coverage ratio, Interest expense estimation of, 388, 434 industry, 434 Interest-on-interest, 614 Interest rate anticipation, active bond management, Interest rate collar, Interest rate forwards, 773 Interest rate futures, Interest rates business cycle and, 413 determination of, duration measures, forecasting, fundamental determinants, impact of bond characteristics, inflation and, parity in FX transactions, risk, stock prices and, swaps, term structure of, trading strategies and, 642 Intermarket Trading System (ITS), Internal liquidity (solvency) ratios, cash ratio, comparative analysis, 299 current ratio, 275 quick ratio, 275 receivables turnover, 276 Internal rate of return (IRR), pricing bonds, 613 International bonds, 588, domestic, 73 Eurozone, Japan, 601 United Kingdom, 600 United States, 601 International economics, business cycle and, 413 International funds, 905 International leading indicator series, 363 Intrinsic value, definition, 733 Inventory turnover, cash conversion cycle, Investment, advisory opinions, 523 Investment Advisers Act of 1940, 925 Investment bankers, relationships, 96 Investment companies, 76 78, See also Asset management breakdown by fund characteristics, closed-end versus open-end, fund management fees, 902 global, 905 organization and management, portfolio objectives, valuing shares, 898 Investment Company Act of 1940, 925 Investment-grade bond indexes, U. S., 139 Investment-grade securities, 587 Investment(s) alternative, constraints, decision process, 318 defined, 4 5 effects of taxes and inflation, legal and regulatory factors, low-liquidity, objectives, risk, 4 unique needs and preferences, 47 Investment strategy bond portfolio, 679 portfolio management, 36 Investor life cycle accumulation phase, benefits of investing early, 33 consolidation phase, 34 gifting phase, 34 goals, insurance, 32 long-term, high-priority goals, 35 lower-priority goals, 35 near-term, high-priority goals, spending phase, 34 Investors, 4 individual life cycle, institutional, strategies over a lifetime, January anomaly APT tests, 245 return prediction studies, 159 Japan bank bonds, 600 benchmark issue bonds, 589 corporate bond market, 600 government agency bonds, government bonds, 588 international bonds, 601 Jensen Portfolio Performance Measure, Junk bonds, 77 J K k. See Required rate of return L Lagging indicators, Land development, Large-cap growth category, 133 Large cap value style category, 133 Leading employment index, 363 Leading indicators, 359 Leases capitalizing, consideration of, 289 implied depreciation for assets, 291 implied interest for assets, 290 Lehman Brothers U. S. Aggregate Bond (LBA), 677 Lehman Brothers U. S. Corporate Bond (LBC), 677 Lehman Brothers U. S. Government Bond (LBG), 677 Lending rates, CML, Leveraged buyout (LBO), Life-cycle phases, 33 Life insurance, 32 Life insurance companies, Limited partnership, alternative asset classes, 909 Limit-order processing, NYSE, 115 Limit orders, 109 Liquidity in a good market, 92 needs, 42 transaction costs and, 506 Liquidity preference (term premium) hypothesis, Liquidity risk, 18, 419 external market, Long hedge, 767 Long-leading index, 363 Long position, 729 Long-run real growth rate of the economy, 15 Long-term, high-priority goals, 35 Long-term debt-cash flow ratio, 295 Long-term debt-total capital ratios, 292 Long-Term Equity Anticipation Securities (LEAPS), 805 Low-cost strategy, company analysis and, 458 Lower-priority goals, 35 Low-liquidity investments, Low-load fund, 901 Low positive correlation, 65 Lynch, Peter, favorable attributes of firms, 460 M Macaulay duration, limitations of, Macroeconomic-based risk factor models, Macromarket analysis, Maintenance margin, 111 Management and advisory firm, 892 Management effect, portfolio return, 972 Management fees, investment firms, 902 Margin, 76 Margin account, 765 Margin call, 111

8 1036 INDEX Margin transactions, Market characteristics, decimal pricing, 93 definition, 92 informationally efficient, 152 securities, Market-order processing, NYSE, 115 Market orders, Market portfolio, Market risk premium, in CAPM, Market-timing risk, 248 Market value added (MVA), EVA relationship, 498 Markowitz Portfolio Theory, alternative measures of risk, 183 efficient frontier, efficient frontier and investor utility, 199 estimation issues, 197 expected rates of return, standard deviation of a portfolio, three-asset portfolio, variance (standard deviation) of returns for a portfolio, variance (standard deviation) of returns for individual investment, 184 Matched-funding management strategies, Mean rates of return computing, 7 9 dollar-weighted, 9 portfolio of investments, 9 single investment, 7 8 value-weighted, 9 Mean reverting, 552 Merrill Lynch-Wilshire Capital Markets Index (ML-WCMI), 139, 142 Microeconomic-based risk factor models, Microvaluation analysis, world markets, Midcap growth style category, 133 Midcap value style category, 133 Modified duration bond price volatility and, 643, limitations, Modified-duration-convexity effects, 651 Money market funds, 76 77, 902 calculating implied forward rates, 800 Money supply, Money-weighted returns, Morgan Stanley Capital International (MSCI) Indexes, 78, Mortgage bonds, 71, 594 Mortgage pass-through securities, Mortgage trusts, 78 Moving average, 526 lines, Multifactor models, estimating risk, in practice, risk estimation and, Multiple discriminant analysis, credit analysis, 687 Multiple-indicator charts, Multiplier effect, government spending, 320 Municipal bonds, 70 71, 94 insurance, 593 quotes, secondary markets for, Mutual funds, 56, 76 cash positions, comparing risk exposures, fund characteristics, global or international, 905 objectives, open-ended investment company, 898 organization and strategy, N NASDAQ market, 104 information on bond prices, listing requirements, 105 new trading systems, 115 versus NYSE volume, NASDAQ OTC Electronic Bulletin Board (OTCBB), 106 NASDAQ Quotation system, NASDAQ Small Cap Market, 106 National Association of Insurance Commissioners (NAIC), National Association of Securities Dealers Automated Quotation. See NASDAQ National Association of Securities (NASD), 602 National Bureau of Economic Research (NBER), 358 National Quotation Bureau (NQB) pink sheets, National Securities Markets Improvement Act of 1996, 926 Near-term, high-priority goals, Negative correlation, 65 Negative growth model, 494 Neglected firms, trading activity and, Negotiated sales, 94 Net asset value (NAV), 898 Net fixed asset turnover, 279 Net present value (NPV), pricing bonds, 612 Net profit margin, 281 estimate for company analysis, 475 foreign stocks, 348 New issues, New York Mercantile Exchange (NYM), Commodity Exchange (CMX), 765 New York Stock Exchange (NYSE), ADRs, 74 changes, information on bond prices, versus NASDAQ, new trading systems, 115 Nikkei-Dow Jones Average, price-weighted index, 131 No-growth firm, Noise traders, 171 No-load fund, 901 Nominal risk-free rate (NRFR), 15 17, Nominal yield, 613 Noncallable provision, bond maturity, 581 Nonlife insurance companies, 58 Nonrated bonds, 585 Nonrefunding provision, bond maturity, 581 Normal portfolio. See Benchmark portfolio Notional principal, 848 NYSE. See New York Stock Exchange O Offensive competitive strategy, /30 strategy, 550 Open Automated Report Service (OARS), NYSE, 115 Open-end funds, load versus no-load, 901 Open-end investment companies, 898, 900 Operating efficiency ratios, equity turnover, net fixed asset turnover, 279 total asset turnover, Operating free cash flow, 327 Operating leverage, 288 Operating performance, comparative analysis, 299, 301 Operating profitability ratios, common size income statement, 281 DuPont system, extended DuPont System, gross profit margin, 280 net profit margin, 281 operating profit margin, return on owner s equity, 282 return on total invested capital, Operating profit margin, industry forecast, 432 Optimum portfolio, 181, 199 Option-adjusted (call-adjusted) duration, 654 Option-adjusted spreads, Option-based interest rate contracts, Option contracts, chooser options, covered call options, 831 forward contract relationship, price quotations, profit diagrams, protective put options, put-call parity, 743, put-call-spot parity, range forwards, spreads, straddles, strips, and straps, strangles, 834 terms, trading markets, valuation, 733,

9 INDEX 1037 American-style options, basic approach, binomial option pricing model, Black-Scholes valuation model, , , dividend-bearing securities, estimating volatility, European-style put options, improving forecast accuracy, Option markets, conventions, exchange-traded, price quotations for, Option premium, 733 Options, 75 leverage and, real, trading strategies, Options Clearing Corporation (OCC), Order-driven market (pure auction market), 98, 116 Organization for Economic Cooperation and Development (OECD), 53 Overconfidence bias, Overfunded plans, 56 Overreaction hypothesis, 552 Over-the-counter (OTC) market, interest rate agreements, forward-based interest rate contracts, option-based interest rate contracts, Payback (break-even time), bonds, Peer group comparison, evaluation of portfolio managers, Pension funds, Pension Protection Act of 2007, Perpetuity, 325 Personal net worth, 33 Point-and-figure charts, Point estimate, 9 Policy effect, portfolio return, 972 Policy statement asset allocation importance, benchmark portfolio, 37 construction of, evaluating portfolio performance, input to, investment constraints, investment objectives, investor goals, need for, other benefits, 38 portfolio management, 35 Politics and regulations, industry analysis and, Portfolio, 5 benchmark, 37 P characteristic line, 246 completely diversified, 211 construction, 36 continual monitoring, 36 optimum, 181, 199 risky, standards for evaluating performance, three-asset, turnover, 558 Portfolio management. See also Equity portfolio management definition of risk, 182 derivatives in, efficient markets and, equity, flexible funds (asset allocation), 902 introduction, minimum variance, process, requirements of portfolio manager, 936 risk aversion in, 182 with superior analysts, without superior analysts, 175 Portfolio performance attribution analysis, example, extensions, bonds, performance attribution, returns-based measurement, components, composite measures, application of, 950 comparison, Information Portfolio Performance Measure, Jensen Portfolio Performance Measure, multiple risk factors, potential bias for one-parameter measures, 953 Sharpe Portfolio Performance Measure, total sample results, Treynor s Composite Measure, 941 evaluating selectivity, diversification, 957 Fama performance measure, 957 evaluation before 1960, 939 factors affecting performance measures, global benchmark problem, implications, 969 required characteristics, holdings-based, characteristic selectivity (CS) measure, Grinblatt-Titman performance measure, market timing skills, measures with downside risk, Sortino and Sharpe comparison, Sortino measure, peer group comparisons, relationship among performance measures, 955 reporting investment performance, performance presentation standards, time-weighted and dollar-weighted returns, requirements of portfolio manager, 938 Potential return, Preferred habitat theory, 638 Preferred stock, convertible, 916 valuation of, Present consumption, 4 Present value of free cash flow to equity, 336, 461, Present value of operating free cash flow, Price/book value ratio, , 440, 487 Price/cash flow ratio, 339, 440, Price continuity, in a good market, 92 Price/earnings/growth rate (PEG) ratio, Price/earnings (P/E) ratio, 160, 337 Price for loanable funds, interest rate, 624 Price momentum strategy, 552, 556 Price risk, bond portfolio management, 699 Price/sales ratio, 340, 443, Price-weighted index, Price-yield curve, 611 Primary capital markets, Principal (par value), bond, 580 Private equity investment, development and organization, investment process, returns to, Private placements, 94 Rule 144A and, Professional money managers, strong-form EMH, Promised yield to call (YTC), computation, 617 Promised yield to maturity (YTM), computation of, Prospect theory, 170 Protective puts, 752 alternative way to pay, Prudent Capital Management (PCM), Pure auction market (order-driven market), 98, 116 Pure cash-matched dedicated portfolio, 698 Pure (excess) profits, 491 Pure rate of interest, 4 Pure time value of money, 4, 15 Pure yield pickup swap, Putable bonds, 659

10 1038 INDEX Put-call-forward parity, Put-call parity, 743, Put-call-spot parity, , Put option, 75 76, 524, 732, European style, protecting portfolio value with, protective, Q Quadratic optimization, portfolio construction technique, 542 Quality (credit) spread, 627 Quarterly earnings reports, return prediction studies, Quasi government and foreign government bonds, 583 Quick ratio, liquidity measure, 275 Quote-driven market (dealer market), 98, 116 R Range forwards, Range of returns, measure of risk, 183 Rate anticipation effect, portfolio return, 972 Rates of change, 362 Rates of return abnormal, 157 bonds, 582 expected, 5, 157 historical, 5 7, industry, estimation of, required. See Required rates of return risk-free, 206 Raw land, 78 Real estate, 78 79, direct investment, 78 Real estate investment trusts (REITs), 78 Realized (horizon) yield, differential reinvestment rates, Real options, company valuation with, defined, 879 Real risk-free rate (RRFR), 15, 341 foreign, 343 interest, Receivables turnover, liquidity measure, 276 Refunding issues, 581 Regional stock exchanges, 107 Registered competitive market makers (RCMMs), 108 Registered traders, 108 Regulation Fair Disclosure (REGFD), 168 Relative strength (RS) ratios, 530 Relative valuation ratio, , Relative valuation techniques, Relative variability, 13 Rental property, 79 Representativeness bias, 171 Required rates of return, 4, 14 25, 323, 343 actual returns above, earnings multiplier, 480 estimate, foreign securities, industry multiplier, 439 relation of earnings multiplier, 393 summary, 20 summary of changes, valuation process, Resistance levels, 528 Retention rates, foreign stocks, 348 Return on equity, 421 Return on owner s equity, 282 Return on total invested capital, Return prediction studies, semistrong-form EMH, 157, Returns. See Rates of return Revenue bonds, 581 Reverse floating-rate contract, 877 Rising trend channel, 521 Risk. See also specific risk business, 17 country (political), 19, 506 different asset classes, exchange rate, 18 financial, 18 industry differences, 410 market portfolio, in multifactor setting, in portfolio management, relative measure of, 13 returns relationship, systematic, 19, 211 unsystematic, 211 Risk analysis, 39 40, business risk, comparative, 301 financial risk, Risk arbitrage investing, Risk aversion, 11, 181 portfolio theory, 182 Risk-free asset, 206 combining with a risky portfolio, covariance with, 207 Risk-free investment, probability distribution, 10 Risk premium (RP), 4, 17 foreign securities, portfolio theory and, 19 proxies, return prediction studies, 158 valuation theory and, Risk-returns alternative investments, risk-free asset plus risky portfolio, 208 Risky asset, 207, Risky investment, probability distribution, 11, 12 Roll and Ross study empirical test of APT, extensions, 244 Rule 390, 117 Rule 415, 96 Rule 144A, private placements and, Runs test, of independence in EHM, Russell 1000 Growth and Value Index, 563 S Sales forecast, company, Sales per share, forecasting, 428 Sales per share for a market series, estimation of, Sales variability, 287 Sampling, portfolio construction technique, 542 Savings account, as a fixed-income investment, 70 Seasoned equity issues, 95 Secondary equity markets, Secondary financial markets, bonds, 97 importance of, 97 Sector rotation strategy, 550 Secured bonds, 71 Secured (senior) bonds, 580 Securities convertible, 865 foreign, rates of return, 64 U. S., rates of return, 64 Securities Act of 1933, 925 Securities Exchange Act of 1934, 925 Securities Industry and Financial Markets Association (SIFMA), 582 Securities markets global consolidation, 119 organization of, world, 119 Securities valuation. See Valuation Securitized/collateralized bonds, Security analysts, strong-form EMH, Security-market indexes, comparison over time, computational procedure, 129 factors in constructing, returns and risk, 143 sample, weighing sample members, 129 Security-market line (SML), 21 in CAPM, changes in the slope, estimated rates of return, 217 heterogeneous expectations and planning periods, movement along, transaction costs, 224 undervalued and overvalued assets, Segmented market hypothesis, 638 SelectNet, NASDAQ, 115 Self-attribution bias, 171

11 INDEX 1039 Semistrong-form efficient market hypothesis, 153 adjustment for market effects, predicting cross-sectional returns, results of event studies, results of return prediction studies, summary, 166 Semivariance, measure of risk, 183 Separation theorem, CML and, 212 Serial obligation bond, 580 Sharpe Portfolio Performance Measure, comparative measures, 944 Short hedge, 767 Short sales, Simple growth model, Single-index market model, 246 Sinking fund, 581 Size effect, 161 Small Business Investment Companies (SBIC), 919 Small-cap growth style category, 133 Small-cap value style category, 133 Small-firm effect, Small-Order Execution System (SOES), NASDAQ, 115 SMB (small minus big), 248 Socially responsible investment (SRI) funds, 133 Soft dollars, 928 Sortino measure, Sovereign bonds, 583 Specialists, functions, 114 income, U. S. markets, Special orders, 109 Special situations, private equity transaction, 913, 920 Specific estimate approach, earnings multiplier, Speculative bonds, 587 Speculative companies, 455 Speculative stocks, 455 Spending phase, investor life cycle, 34 Split bond rating, 586 Spot market, currency quotations, 789 Spot prices, forward price relationship, Spot rate, calculating forward rates from, Spreads, S&P (Standard & Poor s) 500, 76 Standard deviation. See also Variance, computation computation, expected rate of return, 13 for a portfolio, risk-free asset plus risky portfolio, Standard deviation of expected returns measure of risk, 183 returns for a portfolio, returns for individual investment, 184 Static yield spreads, Stock exchange specialists, strong-form EMH, 167 Stock index arbitrage, 782 futures valuation and, implementing a strategy, program trading, 785 Stock index futures, application, 787 fundamentals, valuation and index arbitrage, Stock index options, Black-Scholes model, quotations, 806 Stock market analysis, Stock market anomalies, APT and, Stock market earnings multiplier estimation of, industry multiplier versus, 439 Stock-market indexes, , foreign, 533 Stock option, quotations, 804 Stock price tree creating, expanding, valuing in other subintervals, Stocks. See also specific type cyclical, 455 defensive, 455 growth, speculative, 455 value, 456 Stock split studies, semistrong-form EMH, 163 Stock valuation, versus company analysis, Stock valuation models, Stop buy order, 109 Stop loss order, 109 Straddles, Strangles, Strap, 833 Strategic asset allocation, 570 Striking price, 75 Strip, 833 Strong-form efficient market hypothesis (EMH), conclusions, corporate insider trading, professional money managers, security analysts, stock exchange specialists, 167 Structural changes, influence on company analysis, Structural economic changes, 411 alternative industries and, Style analysis grid, 563, 565 overview, two mutual funds, 566 value and growth portfolios, 564 Style indexes, 133 Subordinated bonds, 71 Subordinate (junior) debentures, 580 Substitution swap, Super Dot, NYSE, 115 Support levels, 528 Sustainable growth potential, 297 Swap contracting extensions, Swap-linked notes, Swaps credit-related, equity index-linked, Swap spreads, interest rates, SWOT analysis, in company analysis, Synthetic fixed-rate funding with Eurodollar strip, Synthetic risk-free portfolio, 809 Synthetic securities, Systematic risk, 19, 81 82, 128, 420 versus fundamental risk, 20 return and, stability, 226 Tactical asset allocation, 550, Tax efficiency, 558 Taxes average rate, 43 effects on investments, investment planning concerns, 43 marginal rate, 43 Tax-exempt bonds, yield adjustments for, 621 Tax rate estimation of, 389 industry, 434, 436 Tax swap, T-bill-Eurodollar yield spread, 525 T-bills. See Treasury bills Technical analysis. See also Fundamental analysis advantages, bond markets, challenges to, challenges to trading rules, 521 contrary opinion rules, EMH, 172 foreign markets, momentum indicators, stock price and volume techniques, underlying assumptions, Term bond, 580 Term to maturity, 610 bonds, 580 Third market, 107 Thomas J. Herzfeld Advisors, closed-end funds, 900 Three-asset portfolio, Time horizon, T