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ISBN-10 ‏ : ‎ 0073530700
ISBN-13 ‏ : ‎ 978-0073530703
Author: Zvi Bodie (Author), Alex Kane (Author), Alan Marcus (Author)

Bodie, Kane, and Marcus’ Investments sets the standard for graduate/MBA investments textbooks. It blends practical and theoretical coverage, while maintaining an appropriate rigor and a clear writing style. Its unifying theme is that security markets are nearly efficient, meaning that most securities are priced appropriately given their risk and return attributes. The text places greater emphasis on asset allocation and offers a much broader and deeper treatment of futures, options, and other derivative security markets than most investment texts. It is also the only graduate Investments text to offer an online homework management system, McGraw-Hill’s Connect Finance.

Table of Content:

PART I: INTRODUCTION
CHAPTER 1 The Investment Environment
1.1 Real Assets versus Financial Assets
1.2 Financial Assets
1.3 Financial Markets and the Economy
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
1.5 Markets Are Competitive
The Risk–Return Trade-Off
Efficient Markets
1.6 The Players
Financial Intermediaries
Investment Bankers
Venture Capital and Private Equity
1.7 The Financial Crisis of 2008
Antecedents of the Crisis
Changes in Housing Finance
Mortgage Derivatives
Credit Default Swaps
The Rise of Systemic Risk
The Shoe Drops
The Dodd–Frank Reform Act
The Canadian Experience of the Financial Crisis
1.8 Outline of the Text
End of Chapter Material
CHAPTER 2 Financial Markets, Asset Classes, and Financial Instruments
2.1 The Money Market
Treasury Bills
Certificates of Deposit
Commercial Paper
Bankers’ Acceptances
Repos and Reverses
The Bank of Canada Overnight Rate and the U.S. Federal Funds Rate
Brokers’ Call Loans
The LIBOR Market
Yields on Money Market Instruments
T-Bill Yields
2.2 The Bond Market
Government of Canada Bonds
Inflation-Protected Bonds
Provincial Bonds
Corporate Bonds
Municipal Bonds
International Bonds
Mortgages and Mortgage-Backed Securities
2.3 Equity Securities
Common Stock as Ownership Shares
Characteristics of Common Stock
Stock Market Listings
Income Trusts
Preferred Stock
Depository Receipts
2.4 Stock and Bond Market Indexes
Stock Market Indexes
Toronto Stock Exchange Indexes
Dow Jones Averages
Standard & Poor’s U.S. Indexes
Other U.S. Market-Value Indexes
Equally Weighted Indexes
Other Foreign and International Stock Market Indexes
Bond Market Indicators
2.5 Derivative Markets
Options
Futures Contracts
Other Derivative Assets Warrants, Swaps, and Hybrid Securities
End of Chapter Material
CHAPTER 3 How Securities Are Traded
3.1 How Firms Issue Securities
Privately Held Firms
Publicly Traded Companies
Shelf Registration
Short Form Prospectus Distribution System (SFPD)
Initial Public Offerings
3.2 How Securities Are Traded
Types of Markets and Orders
Types of Orders
Trading Mechanisms
The Execution of Trades
Settlement
The Rise of Electronic Trading
3.3 Securities Markets
The Toronto Stock Exchange
The Bond Market
U.S. Markets
NASDAQ
The New York Stock Exchange
ECNs
New Trading Strategies
Foreign Markets
Derivative Markets
3.4 Trading Costs
Internet Investing
3.5 Trading with Margin and Short Sales
Trading with Margin
Buying on Margin
Short Sales
3.6 Regulation of Securities Markets
Regulatory Responses to Recent Scandals and the 2008–09 Financial Crisis
Self-Regulation and Circuit Breakers
Short-Selling Circuit Breakers
Insider Trading
End of Chapter Material
Appendix 3A A Detailed Margin Position
CHAPTER 4 Mutual Funds and Other Investment Companies
4.1 Investment Companies
4.2 Types of Investment Companies
Other Investment Organizations
4.3 Mutual Funds
Investment Policies
How Funds Are Sold
4.4 Costs of Investing in Mutual Funds
Fee Structure
Fees and Mutual Fund Returns
4.5 Taxation of Mutual Fund Income
4.6 Exchange-Traded Funds
4.7 Mutual Fund Investment Performance A First Look
4.8 Information on Mutual Funds
End of Chapter Material
PART II: PORTFOLIO THEORY AND PRACTICE
CHAPTER 5 Risk, Return, and the Historical Record
5.1 Determinants of the Level of Interest Rates
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
Annual Percentage Rates
Continuous Compounding
5.3 Bills and Inflation, 1957–2016
5.4 Risk and Risk Premiums
Holding-Period Returns
Expected Return and Standard Deviation
Excess Returns and Risk Premiums
5.5 Time Series Analysis of Past Rates of Return
Time Series versus Scenario Analysis
Expected Returns and the Arithmetic Average
The Geometric (Time-Weighted) Average Return
Variance and Standard Deviation
Mean and Standard Deviation Estimates from Higher-Frequency Observations
The Reward-to-Volatility (Sharpe) Ratio
5.6 The Normal Distribution
5.7 Deviations from Normality and Alternative Risk Measures
Value at Risk
Expected Shortfall
Lower Partial Standard Deviation and the Sortino Ratio
Relative Frequency of Large, Negative 3-Sigma Returns
5.8 Historic Returns on Risky Portfolio
A Global View of the Historical Record
5.9 Long-Term Investments
Short-Run versus Long-Run Risk
Forecasts for the Long Haul
End of Chapter Material
CHAPTER 6 Capital Allocation to Risky Assets
6.1 Risk and Risk Aversion
Risk, Speculation, and Gambling
Risk Aversion and Utility Values
Estimating Risk Aversion
6.2 Capital Allocation Across Risky and Risk-Free Portfolios
6.3 The Risk-Free Asset
6.4 Portfolios of One Risky Asset and a Risk-Free Asset
6.5 Risk Tolerance and Asset Allocation
Non-normal Returns
6.6 Passive Strategies The Capital Market Line
End of Chapter Material
Appendix 6A Risk Aversion, Expected Utility, and the St. Petersburg Paradox
Appendix 6B Utility Functions and Risk Premiums
CHAPTER 7 Optimal Risky Portfolios
7.1 Diversification and Portfolio Risk
7.2 Portfolios of Two Risky Assets
7.3 Asset Allocation with Stocks, Bonds, and Bills
Asset Allocation with Two Risky Asset Classes
7.4 The Markowitz Portfolio Optimization Model
Security Selection
Capital Allocation and the Separation Property
The Power of Diversification
Asset Allocation and Security Selection
Optimal Portfolios and Non-normal Returns
7.5 Risk Pooling, Risk Sharing, and the Risk of Long-Term Investments
Risk Pooling and the Insurance Principle
Risk Sharing
Diversification and the Sharpe Ratio
Time Diversification and the Investment Horizon
End of Chapter Material
Appendix 7A A Spreadsheet Model for Efficient Diversification
Appendix 7B Review of Portfolio Statistics
CHAPTER 8 Index Models
8.1 A Single-Factor Security Market
The Input List of the Markowitz Model
Systematic versus Firm-Specific Risk
8.2 The Single-Index Model
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
The Security Characteristic Line for Suncor
The Explanatory Power of the SCL for Suncor
The Estimate of Alpha
The Estimate of Beta
Firm-Specific Risk
8.4 The Industry Version of the Index Model
Company Beta Estimates
Predicting Betas
Index Models and Tracking Portfolios
Portfolio Construction Using the Single-Index Model with a Detailed Example
Alpha and Security Analysis
The Index Portfolio as an Investment Asset
The Single-Index-Model Input List
The Optimal Risky Portfolio in the Single-Index Model
The Information Ratio
Summary of Optimization Procedure
An Example
Correlation and Covariance Matrix
Is the Index Model Inferior to the Full-Covariance Models?
End of Chapter Material
PART III: EQUILIBRIUM IN CAPITAL MARKETS
CHAPTER 9 The Capital Asset Pricing Model
9.1 The Capital Asset Pricing Model
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
The CAPM and the Single-Index Market
9.2 Assumptions and Extensions of the CAPM
Identical Input Lists
Risk-Free Borrowing and the Zero-Beta Model
Labour Income and Non-traded Assets
A Multi-period Model and Hedge Portfolios
A Consumption-Based CAPM
Liquidity and the CAPM
9.3 The CAPM and the Academic World
9.4 The CAPM and the Investment Industry
End of Chapter Material
CHAPTER 10 Arbitrage Pricing Theory and Multifactor Models of Risk and Return
10.1 Multifactor Models An Overview
Factor Models of Security Returns
10.2 Arbitrage Pricing Theory
Arbitrage, Risk Arbitrage, and Equilibrium
Well-Diversified Portfolios
Diversification and Residual Risk in Practice
Executing Arbitrage
The No-Arbitrage Equation of the APT
10.3 The APT, the CAPM, and the Index Model
The APT and the CAPM
The APT and Portfolio Optimization in a Single-Index Market
10.4 A Multifactor APT
10.5 The Fama–French (FF) Three-Factor Model
End of Chapter Material
CHAPTER 11 The Efficient Market Hypothesis
11.1 Random Walks and the Efficient Market Hypothesis
Competition as the Source of Efficiency
Versions of the Efficient Market Hypothesis
11.2 Implications of the EMH
Technical Analysis
Fundamental Analysis
Active versus Passive Portfolio Management
The Role of Portfolio Management in an Efficient Market
Resource Allocation
11.3 Event Studies
11.4 Are Markets Efficient?
The Issues
Weak-Form Tests Patterns in Stock Returns
Predictors of Broad Market Returns
Semistrong Tests Market Anomalies
Strong-Form Tests Inside Information
Interpreting the Anomalies
Bubbles and Market Efficiency
11.5 Mutual Fund and Analyst Performance
Stock Market Analysts
Mutual Fund Managers
So, Are Markets Efficient?
End of Chapter Material
CHAPTER 12 Behavioural Finance and Technical Analysis
12.1 The Behavioural Critique
Information Processing
Behavioural Biases
Affect
Limits to Arbitrage
Limits to Arbitrage and the Law of One Price
Bubbles and Behavioural Economics
Evaluating the Behavioural Critique
12.2 Technical Analysis and Behavioural Finance
Trends and Corrections
Sentiment Indicators
Indicators of Overall Market Sentiment
A Warning
End of Chapter Material
CHAPTER 13 Empirical Evidence on Security Returns
13.1 The Index Model and the Single-Factor APT
The Expected Return–Beta Relationship
Tests of the CAPM
Canadian Tests of the CAPM
Thin Trading
The Market Index
Measurement Error in Beta
13.2 Tests of the Multifactor CAPM and APT
Labour Income
Private (Non-traded) Business
Early Versions of the Multifactor CAPM and APT
A Macro Factor Model
13.3 Fama–French-Type Factor Models
Size and B/M as Risk Factors
Behavioural Explanations
Momentum A Fourth Factor
13.4 Liquidity and Asset Pricing
13.5 Consumption-Based Asset Pricing and the Equity Premium Puzzle
Consumption Growth and Market Rates of Return
Expected versus Realized Returns
Survivorship Bias
Extensions to the CAPM May Resolve the Equity Premium Puzzle
Liquidity and the Equity Premium Puzzle
Behavioural Explanations of the Equity Premium Puzzle
End of Chapter Material
PART IV FIXED-INCOME SECURITIES
CHAPTER 14 Bond Prices and Yields
14.1 Bond Characteristics
Canadian Government Bonds
Corporate Bonds
Preferred Stock
International Bonds
Innovation in the Bond Market
14.2 Bond Pricing
Bond Pricing between Coupon Dates
14.3 Bond Yields
Yield to Maturity
Yield to Call
Realized Compound Return versus Yield to Maturity
14.4 Bond Prices Over Time
Yield to Maturity versus Holding-Period Return
Zero-Coupon Bonds and Stripped Coupons
After-Tax Returns
14.5 Default Risk and Bond Pricing
Junk Bonds
Determinants of Bond Safety
Bond Indentures
Yield to Maturity and Default Risk
Credit Default Swaps
Credit Risk and Collateralized Debt Obligations
End of Chapter Material
CHAPTER 15 The Term Structure of Interest Rates
15.1 The Yield Curve
Bond Pricing
15.2 The Yield Curve and Future Interest Rates
The Yield Curve Under Certainty
Holding-Period Returns
Forward Rates
15.3 Interest Rate Uncertainty and Forward Rates
15.4 Theories of the Term Structure
The Expectations Hypothesis
Liquidity Preference
15.5 Interpreting the Term Structure
15.6 Forward Rates as Forward Contracts
End of Chapter Material
CHAPTER 16 Managing Bond Portfolios
16.1 Interest Rate Risk
Interest Rate Sensitivity
Duration
What Determines Duration?
16.2 Convexity
Why Do Investors Like Convexity?
Duration and Convexity of Callable Bonds
Duration and Convexity of Mortgage-Backed Securities
16.3 Passive Bond Management
Bond-Index Funds
Immunization
Cash Flow Matching and Dedication
Other Problems with Conventional Immunization
16.4 Active Bond Management
Sources of Potential Profit
Horizon Analysis
End of Chapter Material
PART V: SECURITY ANALYSIS
CHAPTER 17 Macroeconomic and Industry Analysis
17.1 The Global Economy
17.2 The Domestic Macroeconomy
Key Economic Indicators
17.3 Demand and Supply Shocks
17.4 Federal Government Policy
Fiscal Policy
Monetary Policy
Supply-Side Policies
17.5 Business Cycles
The Business Cycle
Economic Indicators
Other Indicators
17.6 Industry Analysis
Defining an Industry
Sensitivity to the Business Cycle
Sector Rotation
Industry Life Cycles
Industry Structure and Performance
End of Chapter Material
CHAPTER 18 Equity Valuation Models
18.1 Valuation by Comparables
Limitations of Book Value
18.2 Intrinsic Value versus Market Price
18.3 Dividend Discount Models
The Constant-Growth DDM
Convergence of Price with Intrinsic Value
Stock Prices and Investment Opportunities
Life Cycles and Multi-stage Growth Models
Multi-stage Growth Models
18.4 Price–Earnings Ratio
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
18.5 Free Cash Flow Valuation Approaches
Comparing the Valuation Models
The Problem with DCF Models
18.6 The Aggregate Stock Market
End of Chapter Material
CHAPTER 19 Financial Statement Analysis
19.1 The Major Financial Statements
The Income Statement
The Balance Sheet
The Statement of Cash Flows
19.2 Measuring Firm Performance
19.3 Profitability Measures
Return on Assets (ROA)
Return on Capital (ROC)
Return on Equity (ROE)
Financial Leverage and ROE
Economic Value Added
19.4 Ratio Analysis
Decomposition of ROE
Turnover and Other Asset Utilization Ratios
Liquidity Ratios
Market Price Ratios Growth versus Value
Choosing a Benchmark
19.5 An Illustration of Financial Statement Analysis
19.6 Comparability Problems
Inventory Valuation
Depreciation
Inflation and Interest Expense
Fair Value Accounting
Quality of Earnings and Accounting Practices
International Accounting Conventions
19.7 Value Investing The Graham Technique
End of Chapter Material
PART VI: OPTIONS, FUTURES, AND OTHER DERIVATIVES
CHAPTER 20 Options Markets Introduction
20.1 The Option Contract
Options Trading
American and European Options
Adjustments in Option Contract Terms
Options Clearing
Other Listed Options
20.2 Values of Options at Expiration
Call Options
Put Options
Option versus Stock Investments
20.3 Option Strategies
Protective Put
Covered Calls
Straddle
Spreads
Collars
20.4 The Put–Call Parity Relationship
20.5 Option-Like Securities
Callable Bonds
Convertible Securities
Warrants
Collateralized Loans
Levered Equity and Risky Debt
20.6 Financial Engineering
20.7 Exotic Options
Asian Options
Barrier Options
Lookback Options
Currency-Translated Options
Digital Options
End of Chapter Material
CHAPTER 21 Option Valuation
21.1 Option Valuation Introduction
Intrinsic and Time Values
Determinants of Option Values
21.2 Restrictions on Option Values
Restrictions on the Value of a Call Option
Early Exercise and Dividends
Early Exercise of American Puts
21.3 Binomial Option Pricing
Two-State Option Pricing
Generalizing the Two-State Approach
Making the Valuation Model Practical
21.4 Black–Scholes Option Valuation
The Black–Scholes Formula
Dividends and Call Option Valuation
Put Option Valuation
Dividends and Put Option Valuation
21.5 Using the Black–Scholes Formula
Hedge Ratios and the Black–Scholes Formula
Portfolio Insurance
Option Pricing and the Crisis of 2008–2009
Option Pricing and Portfolio Theory
Hedging Bets on Mispriced Options
21.6 Empirical Evidence on Option Pricing
End of Chapter Material
CHAPTER 22 Futures Markets
22.1 The Futures Contract
The Basics of Futures Contracts
Existing Contracts
22.2 Trading Mechanics
The Clearinghouse and Open Interest
The Margin Account and Marking to Market
Cash versus Actual Delivery
Regulations
Taxation
22.3 Futures Markets Strategies
Hedging and Speculation
Basis Risk and Hedging
22.4 Futures Prices
The Spot–Futures Parity Theorem
Spreads
Forward versus Futures Pricing
22.5 Futures Prices versus Expected Spot Prices
Expectations Hypothesis
Normal Backwardation
Contango
Modern Portfolio Theory
End of Chapter Material
CHAPTER 23 Futures, Swaps, and Risk Management
23.1 Foreign Exchange Futures
The Markets
Interest Rate Parity
Direct versus Indirect Quotes
Using Futures to Manage Exchange Rate Risk
23.2 Stock-Index Futures
The Contracts
Creating Synthetic Stock Positions An Asset Allocation Tool
Index Arbitrage
Using Index Futures to Hedge Market Risk
23.3 Interest Rate Futures
Hedging Interest Rate Risk
23.4 Swaps
Swaps and Balance Sheet Restructuring
The Swap Dealer
Other Interest Rate Contracts
Swap Pricing
Credit Risk in the Swap Market
Credit Default Swaps
23.5 Commodity Futures Pricing
Pricing with Storage Costs
Discounted Cash Flow Analysis for Commodity Futures
End of Chapter Material
PART VII: APPLIED PORTFOLIO MANAGEMENT
CHAPTER 24 Portfolio Performance Evaluation
24.1 The Conventional Theory of Performance Evaluation
Average Rates of Return
Time-Weighted Returns versus Dollar-Weighted Returns
Adjusting Returns for Risk
The Sharpe Ratio for Overall Portfolios
The Treynor Ratio
The Information Ratio
The Role of Alpha in Performance Measures
Implementing Performance Measurement An Example
Realized Returns versus Expected Returns
24.2 Style Analysis
24.3 Performance Measurement with Changing Portfolio Composition
Performance Manipulation and the Morningstar Risk-Adjusted Rating
24.4 Market Timing
The Potential Value of Market Timing
Valuing Market Timing as a Call Option
The Value of Imperfect Forecasting
24.5 Performance Attribution Procedures
Asset Allocation Decisions
Sector and Security Selection Decisions
Summing Up Component Contributions
End of Chapter Material
CHAPTER 25 International Diversification
25.1 Global Markets for Equities
Developed Countries
Emerging Markets
Market Capitalization and GDP
Home-Country Bias
25.2 Exchange Rate Risk and International Diversification
Exchange Rate Risk
Investment Risk in International Markets
International Diversification
Are Benefits from International Diversification Preserved during Bear Markets?
25.3 Political Risk
25.4 International Investing and Performance Attribution
Constructing a Benchmark Portfolio of Foreign Assets
Performance Attribution
End of Chapter Material
CHAPTER 26 Hedge Funds
26.1 Hedge Funds versus Mutual Funds
26.2 Hedge Fund Strategies
Directional and Non-directional 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
Tail Events and Hedge Fund Performance
26.6 Fee Structure in Hedge Funds
End of Chapter Material
CHAPTER 27 The Theory of Active Portfolio Management
27.1 Optimal Portfolios and Alpha Values
Forecasts of Alpha Values and Extreme Portfolio Weights
Restriction of Benchmark Risk
27.2 The Treynor–Black Model and Forecast Precision
Adjusting Forecasts for the Precision of Alpha
Distribution of Alpha Values
Organizational Structure and Performance
27.3 The Black–Litterman Model
Black–Litterman 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
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
A Model for the Estimation of Potential Fees
Results from the Distribution of Actual Information Ratios
Results from Distribution of Actual Forecasts
27.6 Concluding Remarks on Active Management
End of Chapter Material
Appendix 27A: Forecasts and Realizations of Alpha
Appendix 27B: The General Black–Litterman Model
CHAPTER 28 Investment Policy and the Framework of the CFA Institute
28.1 The Investment Management Process
Objectives
Individual Investors
Personal Trusts
Mutual Funds
Pension Funds
Endowment Funds
Life Insurance Companies
Non–life Insurance Companies
Banks
28.2 Constraints
Liquidity
Investment Horizon
Regulations
Tax Considerations
Unique Needs
28.3 Policy Statements
Sample Policy Statements for Individual Investors
28.4 Asset Allocation
Taxes and Asset Allocation
28.5 Managing Portfolios of Individual Investors
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
28.6 Pension Funds
Defined Contribution Plans
Defined Benefit Plans
Pension Investment Strategies
28.7 Investments for the Long Run
Making Simple Investment Choices
Inflation Risk and Long-Term Investors
End of Chapter Material
References to CFA Problems
Glossary
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Commonly Used Notations
Useful Formulas