The Theory and Practice of Investment Management 2e

<p>About the Editors xiii<br /><br />Contributing Authors xv<br /><br />Foreword xvii<br /><br />PART ONE Instruments, Asset Allocation, Portfolio Selection, and Asset Pricing 1<br /><br />CHAPTER 1 Overview of Investment Management 3<br />Frank J. Fabozzi and Harry M. Markowitz<br /><br />Setting Investment Objectives 4<br /><br />Establishing an Investment Policy 4<br /><br />Selecting a Portfolio Strategy 6<br /><br />Constructing the Portfolio 6<br /><br />Measuring and Evaluating Performance 7<br /><br />Key Points 14<br /><br />CHAPTER 2 Asset Classes, Alternative Investments, Investment Companies, and Exchange–Traded Funds 15<br />Mark J. P. Anson, Frank J. Fabozzi, and Frank J. Jones<br /><br />Asset Classes 15<br /><br />Overview of Alternative Asset Products 21<br /><br />Investment Companies 31<br /><br />Exchange–Traded Funds 36<br /><br />Mutual Funds vs. ETFs: Relative Advantages 39<br /><br />Key Points 41<br /><br />Questions 44<br /><br />CHAPTER 3 Portfolio Selection 45<br />Frank J. Fabozzi, Harry M. Markowitz, Petter N. Kolm, and Francis Gupta<br /><br />Some Basic Concepts 47<br /><br />Measuring a Portfolio s Expected Return 49<br /><br />Measuring Portfolio Risk 52<br /><br />Portfolio Diversification 56<br /><br />Choosing a Portfolio of Risky Assets 60<br /><br />Issues in Portfolio Selection 68<br /><br />Key Points 76<br /><br />Questions 78<br /><br />CHAPTER 4 Capital Asset Pricing Models 79<br />Frank J. Fabozzi and Harry M. Markowitz<br /><br />Sharpe–Lintner CAPM 79<br /><br />Roy CAPM 81<br /><br />Confusions Regarding the CAPM 82<br /><br />Two Meanings of Market Efficiency 83<br /><br />CAPM Investors Do Not Get Paid for Bearing Risk 94<br /><br />The Two Beta Trap 95<br /><br />Key Points 100<br /><br />Questions 101<br /><br />CHAPTER 5 Factor Models 103<br />Guofu Zhou and Frank J. Fabozzi<br /><br />Arbitrage Pricing Theory 104<br /><br />Types of Factor Models 105<br /><br />Factor Model Estimation 112<br /><br />Key Points 118<br /><br />Appendix: Principal Component Analysis in Finance 119<br /><br />Questions 124<br /><br />CHAPTER 6 Modeling Asset Price Dynamics 125<br />Dessislava A. Pachamanova and Frank J. Fabozzi<br /><br />Financial Time Series 125<br /><br />Binomial Trees 127<br /><br />Arithmetic Random Walks 128<br /><br />Geometric Random Walks 134<br /><br />Mean Reversion 142<br /><br />Advanced Random Walk Models 148<br /><br />Stochastic Processes 152<br /><br />Key Points 157<br /><br />Questions 158<br /><br />CHAPTER 7 Asset Allocation and Portfolio Construction 159<br />No&euml;l Amenc, Felix Goltz, Lionel Martellini, and Vincent Milhau<br /><br />Asset Allocation and Portfolio Construction Decisions in the<br /><br />Optimal Design of the Performance–Seeking Portfolio 161<br /><br />Asset Allocation and Portfolio Construction Decisions in the<br /><br />Optimal Design of the Liability–Hedging Portfolio 173<br /><br />Dynamic Allocation Decisions to the Performance–Seeking and Liability–Hedging Portfolios 179<br /><br />Key Points 195<br /><br />Appendix 196<br /><br />Questions 202<br /><br />PART TWO Equity Analysis and Portfolio Management 205<br /><br />CHAPTER 8 Fundamentals of Common Stock 207<br />Frank J. Fabozzi, Frank J. Jones, Robert R. Johnson, and Pamela P. Drake<br /><br />Earnings 208<br /><br />Dividends 210<br /><br />The U.S. Equity Markets 213<br /><br />Trading Mechanics 215<br /><br />Trading Costs 220<br /><br />Stock Market Indicators 222<br /><br />Key Points 224<br /><br />Questions 226<br /><br />CHAPTER 9 Common Stock Portfolio Management Strategies 229<br />Frank J. Fabozzi, James L. Grant, and Raman Vardharaj<br /><br />Integrating the Equity Portfolio Management Process 229<br /><br />Capital Market Price Efficiency 230<br /><br />Tracking Error and Related Measures 233<br /><br />Active vs. Passive Portfolio Management 239<br /><br />Equity Style Management 240<br /><br />Passive Strategies 245<br /><br />Active Investing 247<br /><br />Performance Evaluation 264<br /><br />Key Points 267<br /><br />Questions 268<br /><br />CHAPTER 10 Approaches to Common Stock Valuation 271<br />Pamela P. Drake, Frank J. Fabozzi, and Glen A. Larsen Jr.<br /><br />Discounted Cash Flow Models 271<br /><br />Relative Valuation Methods 278<br /><br />Key Points 284<br /><br />Questions 285<br /><br />CHAPTER 11 Quantitative Equity Portfolio Management 287<br />Andrew Alford, Robert Jones, and Terence Lim<br /><br />Traditional and Quantitative Approaches to<br /><br />Equity Portfolio Management 289<br /><br />Forecasting Stock Returns, Risks, and Transaction Costs 292<br /><br />Constructing Portfolios 298<br /><br />Trading 300<br /><br />Evaluating Results and Updating the Process 302<br /><br />Key Points 304<br /><br />Questions 305<br /><br />CHAPTER 12 Long–Short Equity Portfolios 307<br />Bruce I. Jacobs and Kenneth N. Levy<br /><br />Constructing a Market–Neutral Portfolio 308<br /><br />The Importance of Integrated Optimization 312<br /><br />Adding Back a Market Return 316<br /><br />Some Concerns Addressed 321<br /><br />Evaluating Long–Short 323<br /><br />Key Points 324<br /><br />Questions 325<br /><br />CHAPTER 13 Multifactor Equity Risk Models 327<br />Frank J. Fabozzi, Raman Vardharaj, and Frank J. Jones<br /><br />Model Description and Estimation 328<br /><br />Risk Decomposition 330<br /><br />Applications in Portfolio Construction and Risk Control 336<br /><br />Key Points 341<br /><br />Questions 343<br /><br />CHAPTER 14 Fundamentals of Equity Derivatives 345<br />Bruce M. Collins and Frank J. Fabozzi<br /><br />The Role of Derivatives 345<br /><br />Listed Equity Options 348<br /><br />Futures Contracts 366<br /><br />Pricing Stock Index Futures 370<br /><br />OTC Equity Derivatives 375<br /><br />Structured Products 380<br /><br />Key Points 381<br /><br />Questions 382<br /><br />CHAPTER 15 Using Equity Derivatives in Portfolio Management 383<br />Bruce M. Collins and Frank J. Fabozzi<br /><br />Equity Investment Management 384<br /><br />Portfolio Applications of Listed Options 386<br /><br />Portfolio Applications of Stock Index Futures 390<br /><br />Applications of OTC Equity Derivatives 399<br /><br />Risk and Expected Return of Option Strategies 410<br /><br />Key Points 413<br /><br />Questions 414<br /><br />PART THREE Bond Analysis and Portfolio Management 415<br /><br />CHAPTER 16 Bonds, Asset–Backed Securities, and Mortgage–Backed Securities 417<br />Frank J. Fabozzi<br /><br />General Features of Bonds 417<br /><br />U.S. Treasury Securities 421<br /><br />Federal Agency Securities 423<br /><br />Corporate Bonds 424<br /><br />Municipal Securities 428<br /><br />Asset–Backed Securities 430<br /><br />Residential Mortgage–Backed Securities 434<br /><br />Commercial Mortgage–Backed Securities 450<br /><br />Key Points 453<br /><br />Questions 456<br /><br />CHAPTER 17 Bond Analytics 457<br />Frank J. Fabozzi<br /><br />Basic Valuation of Option–Free Bonds 457<br /><br />Conventional Yield Measures 463<br /><br />Total Return 468<br /><br />Measuring Interest Rate Risk 471<br /><br />Key Points 484<br /><br />Questions 486<br /><br />CHAPTER 18 Bond Analytics 489<br />Frank J. Fabozzi and Steven V. Mann<br /><br />Arbitrage–Free Bond Valuation 489<br /><br />Yield Spread Measures 496<br /><br />Forward Rates 498<br /><br />Overview of the Valuation of Bonds with Embedded Options 505<br /><br />Lattice Model 507<br /><br />Valuation of MBS and ABS 522<br /><br />Key Points 531<br /><br />Questions 533<br /><br />CHAPTER 19 Bond Portfolio Strategies for Outperforming a Benchmark 535<br />B&uuml;lent Bayg&uuml;n and Robert Tzucker<br /><br />Selecting the Benchmark Index 536<br /><br />Creating a Custom Index 539<br /><br />Beating the Benchmark Index 544<br /><br />Key Points 553<br /><br />Questions 554<br /><br />CHAPTER 20 The Art of Fixed Income Portfolio Investing 557<br />Chris P. Dialynas and Ellen J. Rachlin<br /><br />The Global Fixed Income Portfolio Manager 558<br /><br />The Global Challenge 565<br /><br />Portfolio Parameters 565<br /><br />Regulatory Changes, Demographic Trends, and Institutional Bias 568<br /><br />Information in the Markets 569<br /><br />Duration and Yield Curve 573<br /><br />Volatility 574<br /><br />International Corporate Bonds 577<br /><br />International Investing and Political Externalities 579<br /><br />Foreign Investment Selection 579<br /><br />Currency Selection 582<br /><br />Key Points 583<br /><br />Questions 584<br /><br />CHAPTER 21 Multifactor Fixed Income Risk Models and Their Applications 585<br />Anthony Lazanas, Ant&oacute;nio Baldaque da Silva, Radu G&atilde;budean, and Arne D. Staal<br /><br />Approaches Used to Analyze Risk 587<br /><br />Applications of Risk Modeling 615<br /><br />Key Points 621<br /><br />Questions 622<br /><br />CHAPTER 22 Interest Rate Derivatives and Risk Control 623<br />Frank J. Fabozzi<br /><br />Interest Rate Futures and Forward Contracts 623<br /><br />Interest Rate Swaps 634<br /><br />Interest Rate Options 640<br /><br />Interest Rate Agreements (Caps and Floors) 642<br /><br />Key Points 643<br /><br />Questions 644<br /><br />CHAPTER 23 Credit Default Swaps and the Indexes 647<br />Stephen J. Antczak, Douglas J. Lucas, and Frank J. Fabozzi<br /><br />What Are Credit Default Swaps? 648<br /><br />Credit Default Swaps Indexes 654<br /><br />Key Points 658<br /><br />Questions 658<br /><br />About the Web Site 661<br /><br />Index 663</p>