Essentials of Investments page i The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate Stephen A Ross Franco Modigliani Professor of Finance and Economics Sloan School of Management Massachusetts Institute of Technology Consulting Editor FINANCIAL MANAGEMENT Block, Hirt, and Danielsen Foundations of Financial Management Sixteenth Edition Brealey, Myers, and Allen Principles of Corporate Finance Twelfth Edition Brealey, Myers, and Allen Principles of Corporate Finance, Concise Second Edition Brealey, Myers, and Marcus Fundamentals of Corporate Finance Eighth Edition Brooks FinGame Online 5.0 Bruner Case Studies in Finance: Managing for Corporate Value Creation Sixth Edition Cornett, Adair, and Nofsinger Finance: Applications and Theory Third Edition Cornett, Adair, and Nofsinger M: Finance Third Edition DeMello Cases in Finance Second Edition Grinblatt (editor) Stephen A Ross, Mentor: Influence through Generations Grinblatt and Titman Financial Markets and Corporate 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Edition page iii page iv To our wives and eight wonderful daughters ESSENTIALS OF INVESTMENTS, ELEVENTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2019 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2017, 2013, and 2010 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper LWI/LWI 21 20 19 18 ISBN 978-1-26-001392-4 MHID 1-260-01392-8 Portfolio Manager: Chuck Synovec Product Developer: Allison Carroll Marketing Manager: Natalie King Market Development Manager: Trina Mauer Content Project Managers: Angela Norris and Fran Simon Buyer: Sandy Ludovissy Design: Matt Diamond Content Licensing Specialists: Lorraine Buczek Cover Image: Paul Taylor/Getty Images Compositor: SPi Global All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Names: Bodie, Zvi, author | Kane, Alex, 1942- author | Marcus, Alan J., author Title: Essentials of investments / Zvi Bodie, Boston University, Alex Kane, University of California, San Diego, Alan J Marcus, Boston College Description: Eleventh edition | New York, NY : McGraw-Hill Education, [2019] Identifiers: LCCN 2018023993 | ISBN 9781260013924 (alk paper) Subjects: LCSH: Investments Classification: LCC HG4521 B563 2019 | DDC 332.6—dc23 LC record available at https://lccn.loc.gov/2018023993 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites mheducation.com/highered page v About the Authors Zvi Bodie Boston University Professor of Finance and Economics at Boston University School of Management Zvi Bodie is Professor Emeritus at Boston University He holds a PhD from the Massachusetts Institute of Technology and has served on the finance faculty at the Harvard Business School and MIT’s Sloan School of Management He has published widely in scholarly and professional journals on pension investment strategy and life-cycle asset-liability matching In 2007 the Retirement Income Industry Association gave him its Lifetime Achievement Award for applied research Alex Kane University of California, San Diego Professor of Finance and Economics at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego Alex Kane holds a Ph.D from the Stern School of Business of New York University and has been Visiting Professor at the Faculty of Economics, University of Tokyo; Graduate School of Business, Harvard; Kennedy School of Government, Harvard; and Research Associate, National Bureau of Economic Research An author of many articles in finance and management journals, Professor Kane’s research is mainly in corporate finance, portfolio management, and capital markets Alan J Marcus Boston College Mario J Gabelli Professor of Finance at the Carroll School of Management, Boston College Alan Marcus received his Ph.D from MIT, has been a Visiting Professor at MIT’s Sloan School of Management and Athens Laboratory of Business Administration, and has served as a Research Fellow at the National Bureau of Economic Research, where he participated in both the Pension Economics and the Financial Markets and Monetary Economics Groups Professor Marcus also spent two years at the Federal Home Loan Mortgage Corporation (Freddie Mac), where he helped to develop mortgage pricing and credit risk models Professor Marcus has published widely in the fields of capital markets and portfolio theory He currently serves on the Research Foundation Advisory Board of the CFA Institute www.freebookslides.com Present value growth opportunities (PVGO), 402–403 Price-contingent orders, 59–60, 62 Price-earnings multiple, 365n, 408 Price-earnings ratio (P/E), 39, 40, 408–415, 450 aggregate stock market, 420–421 combining with dividend discount model (DDM), 414–415 defined, 408, 448–449 growth opportunities and, 408–414 international accounting conventions and, 458, 459 other comparative valuation ratios and, 415 P/E effect, 237 pitfalls of P/E analysis, 412–414 stock risk and, 412 Price of risk, 123 Price risk, 337–339 Price-to-book ratio, 415, 448, 449 Price-to-cash-flow ratio, 415 Price-to-sales ratio, 415 Price value of a basis point (PVBP), 567–568 Price-weighted average, 41–43, 44 Primary Global Research, 228 Primary markets, 14–15, 55, 58 Prime money market funds, 89 Private equity, 15 Privately held firms, 39, 55 initial public offerings (IPOs), 9, 56–58, 411–412 private placements, 55 Private placements, 55 Probability distributions, 117–122 normal distributions, 119–122 scenario analysis, 117–118 standard deviation, 118 tail risk, 121–122, 130, 658–660 variance, 118 Procter & Gamble, 43 Professional investors categories of, 693–695 constraints, 698 hedge funds and, 12–13 investor objectives, 691–695 mutual fund performance and, 98–101, 591 risk tolerance, 692, 695 top-down investment policies, 700–701 Profitability ratios, 305–306, 439–442 DuPont system, 442–444, 451 economic value added (EVA), 419–420, 441–442 residual income, 441–442 return on assets (ROA), 305–306, 439, 439n, 443–444, 450 return on capital (ROC), 439 return on equity, 305–306, 376, 377, 439–441, 442–444, 449, 450 return on sales (profit margin), 442, 444, 450 Profit margin, 442, 444, 450 Program trading, 565 Progressive tax, 675–676, 678–679 Property and casualty insurance companies, 694, 698 Proprietary trading, 14 www.freebookslides.com Prospect theory, 259, 260 Prospectus, 56 mutual fund, 91, 92, 101 Protective puts, 484–485 Proxy contests, PRS Group (Political Risk Services), 634–636 Prudent investor rule, 693, 696–697 Public companies initial public offerings (IPOs), 9, 56–58, 411–412 Sarbanes-Oxley Act (SOX) of 2002, 9, 77–78 securities issues, 55, 56 Public Company Accounting Oversight Board (PCAOB), 77 Public Service Enterprise, 404 Pure plays, 648–652 Pure yield pickup swaps, 347 Put bonds, 286 Put-call parity relationship, 525–527 Put/call ratio, 271 Put options, 46–47, 48, 475–476 See also Option contracts collars, 490 credit default swaps (CDSs) as implicit, 19, 20, 309–311, 485, 532–533 exotic options, 496 profits and losses, 476, 480–481 protective puts, 484–485 put-call ratio, 271 spreads, 488–490 straddles, 486–488, 490 synthetic, 530 trading mechanics, 474, 476–479 valuation, 524–527 values at expiration, 480–481 Puttable bonds, 286 Q Quality of earnings, 456–458 Quanto, 496 Qubes (NASDAQ ETF), 95, 96 Quick ratio, 305, 447, 450 Qwest Communications, R Rabobank, 30 Rajaratnam, Raj, 227 Ramsey, Mike, 336n Random walk, 225–229 Rapoport, Michael, 457n Rate anticipation swaps, 346–347 Rate of return, 111–114 annualizing, 113–114 buying on margin, 71 holding-period return (HPR), 111 mutual fund, 93, 112 over multiple periods, 111–113 Ratio analysis asset utilization ratios, 445–447 days sales in receivables, 447, 450 page 734 www.freebookslides.com fixed-asset turnover, 445–446, 450 inventory turnover, 446, 450 total asset turnover, 442, 450 benchmark selection, 449 comparability problems, 394–395, 453–459 illustration of, 450–453 for industry groups, 451 leverage ratios, 443–444 compound leverage factor, 450 interest burden, 450 interest coverage, 443, 450 leverage, 14n, 305, 443–444, 450 liquidity ratios, 305, 447–448 cash ratio, 447–448, 450 current ratio, 305, 447, 450 quick ratio, 447, 450 market price ratios, 448–449 earnings yield, 236, 420–421, 450 market-to-book, 448, 450 price-earnings (P/E) See Price-earnings ratio (P/E) profitability ratios, 305–306, 439–442 DuPont system, 442–444, 451 economic value added (EVA), 419–420, 441–442 residual income, 441–442 return on assets (ROA), 305–306, 439, 439n, 443–444, 450 return on capital (ROC), 439 return on equity, 305–306, 376, 377, 439–441, 442–444, 449, 450 return on sales (profit margin), 442, 444, 450 Rau, P R., 264 Real assets, 3–5 Real consumption, 671 Real estate investment trusts (REITs), 87–88 Real interest rate, 114–116 inflation and, 455 versus nominal interest rate, 114–115 Realized compound return, 298–299 Rebalancing, 339–340 Redeemable preferred stock, 40 Redeemable trust certificates, 86 Red Hat, 404 Redington, F M., 336 Refunding, bond, 37, 285–286 Regional funds, 89 Regression equation, 168, 169–170 Regret avoidance, 259 Regulation ATS (SEC), 62 Regulation NMS (National Market System), 63, 65 Regulation of securities markets, 75–78 capital asset pricing model and, 200 federal-level, 55, 56, 62, 75, 77–78, 85 See also U.S Securities and Exchange Commission (SEC) insider trading, 78 self-regulation, 76, 77, 681 state-level, 76 Reinvestment rate risk, 299, 337–339 Relative decline stage, of industry life cycle, 381, 382 Relative strength, 229, 269–270 page 735 www.freebookslides.com Renault, E., 523n Rendleman, Richard J., Jr., 239, 240n Replacement cost, 395 Replicating portfolio, 511 Representativeness bias, 257–258 Repurchase agreements (repos, RPs), 29 Reserve Primary Fund, 31, 88n Reserves for contingencies, international accounting conventions, 458 Residual claims, common stock, 39, 395 Residual income, 441–442 Residual risk, 168 Resistance level, 229 Retirement annuity, 669–670, 681 Retirement plans See Pension funds and retirement plans Return on assets (ROA), 305–306, 439, 439n, 443–444, 450 Return on capital (ROC), 439 Return on equity (ROE), 305–306, 376, 377, 439–441, 443–444, 449, 450 decomposition of, 442–444 financial leverage and, 439–441 Return on sales (profit margin), 442, 444, 450 Reuter, Jonathan, 246–247 Revenue bonds, 34 Revenue recognition, 457–458 Reversal effect, 236, 241–242 Reverse repos, 29 Reversing trade, 551 Reward-to-volatility ratio See Sharpe ratio Risk allocation efficient market hypothesis and, 232 financial markets and, Risk and return, 110–138 See also Performance evaluation asset allocation, 130–137, 147–157 historical record, 124–130, 135–136, 151–152 inflation and real rate of interest, 114–116 portfolio risk, 146–147 See also Diversification probability distributions, 117–122 rates of return, 111–114 risk aversion, 122–124, 134–135, 135n risk premiums, 122–124 risk tolerance, 692, 695 scenario analysis, 117–118, 124–130 tail risk, 121–122, 130, 658–660 Risk aversion, 122–124, 134–135, 135n Risk-free rate, 122–123, 131 Risk management, 485 immunization, 335–341, 344 options in, 481–483 Risk Management Association (RMA), 449 Risk-neutral economy, 518 Risk pooling, 177–178 Risk premium, 122–124 in capital asset pricing model (CAPM) individual asset, 194, 197–199 market portfolio, 194, 196, 201–202 multifactor models, 202–206 predicting, 201–202 www.freebookslides.com Risk-return trade-off, 10–11, 123, 153–154 Risk sharing, 177–178 Risk structure of interest rates, 309 Risk tolerance, 135n, 692, 695 Rite Aid, Ritter, Jay R., 57, 57n, 58n, 236, 258 Road shows, 57 Roberts, Harry, 271, 272n Roll, Richard, 63n, 201, 202, 631–633 Ross, Stephen A., 207, 263, 305n, 517n Roth accounts, 678–679, 681 Royal Bank of Scotland, 30 Royal Dutch Petroleum, 261, 262 R.R Donnelley & Sons, 24 R-square of regression line, 170 Rubinstein, Mark, 533–534 Rule 144A (SEC), 55 Rule 415 (SEC), 56 Russell 1000 index, 103 Russell 2000 (Mini), 59, 60, 564 Rydqvist, K., 58n S SAC Capital Advisors, 227, 228 Sadka, Ronnie, 654–655, 655n Saha, Atanu, 657, 657n St Louis Federal Reserve, 143, 222, 391 Salomon Brothers, 636 Salomon Smith Barney, 14, 67–68 Sample-size neglect, 257–258 Samsung, 381 Samuelson, Paul, 247 Samurai bonds, 34, 287 SAP, 377, 404 Sarbanes-Oxley Act (SOX) of 2002, 9, 77–78 Savings/investment plans, 668–685 adverse selection, 684 alternative savings and consumption, 672 bequests, 685 home ownership, 683 impact of inflation, 670–672 intergenerational transfer, 685 large purchases, 682–683 marriage, 685 real savings and consumption, 670–671 retirement annuity, 669–670, 681 Social Security, 682 taxes and, 672–673 See also Tax shelters uncertain life span, 684 Scandals and frauds of 2000–2002, 9, 76, 77–78, 458 derivative security, 473 Freddie Mac, 457 Hewlett-Packard/Autonomy acquisition, 457–458 inside information/insider trading, 227, 228, 304 LIBOR (2012), 30, 31 www.freebookslides.com Bernard Madoff, 661, 662 NASDAQ (1994), 62 Scenario analysis, 117–118, 124–130 Scheck, Justin, 457n Scherbina, A., 136 Schleifer, A., 260n Scholes, Myron, 202, 518–524 Schwab, 69 SCL See Security characteristic line (SCL) Seasoned equity offerings, 56 Secondary markets, 15, 55 Sector funds, 89 Sector rotation, 379–380 Sector selection, performance attribution procedures, 602–603, 604 Securities Act of 1933, 75, 76, 646 Securities and Exchange Commission (SEC) See U.S Securities and Exchange Commission (SEC) Securities Exchange Act of 1934, 62, 75 Securities Investor Protection Act of 1970, 75 Securities Investor Protection Corporation (SIPC), 75 Securities markets, 3–21, 54–79 See also Financial crisis of 2008–2009; specific types of securities agency problems, 7–8, asset classes See Asset classes and specific asset classes buying on margin, 29, 69–72, 74n consumption timing and, 6–7 corporate ethics, 8–9 corporate governance, 8–9 efficient market hypothesis See Efficient market hypothesis (EMH) financial assets and, 3–6 globalization of stock markets, 68–69 indexes, 27, 41–46 informational role of, See also Efficient market hypothesis (EMH) international trade and, Securities markets—Cont investment process, 9–10 issuing securities, 55–57, 58 initial public offerings (IPOs), 9, 56–58, 411–412 privately held firms, 55 publicly traded companies, 55, 56–58 shelf registration, 56 players, 11–15 regulation of See Regulation of securities markets risk allocation and, risk-return trade-off, 10–11 separation of ownership and management, 7–8, 38 short sales, 72–75 trading costs, 69 trading mechanics, 57–63 electronic communication networks (ECNs), 61, 62–63, 65, 68 market types, 58–59 mechanisms of trading, 61–63 order types, 59–60 trading strategies, 65–68 algorithmic trading, 65–66 bond trading, 67–68 dark pools, 66–67 high-frequency trading, 66, 67 page 736 www.freebookslides.com in the United States, 63–65 Securities offerings, 55–58 Securitization, 17–19, 37–38 Security analysis, 10 agency problem and, business cycles, 371–375 expert-network providers and, 227, 228 fundamental analysis, 230–231, 236–241, 362–363, 459–460 See also Equity valuation; Financial statement analysis with the index models, 174–175, 176 industry analysis, 375–383 macroeconomic analysis, 363–375 proliferation of, 13–14 in security selection process, 9, 10, 26 technical analysis, 229–230, 265–272, 393 Security Analysis (Graham and Dodd), 459–460 Security characteristic line (SCL), 168–170, 596 Security Exchange Act of 1934, 228–229 Security market line (SML), 193, 198–201, 587–588, 589 of arbitrage pricing theory (APT), 209 three-factor, 204–206 two-factor, 203–204 Security selection, 9, 10, 26 investment policy and, 700–701, 703 performance attribution procedures, 602–603, 604 Selection bias issue hedge fund, 656–657 for market efficiency, 233–234 in performance evaluation, 591, 592 Self-regulation, of securities markets, 76, 77, 691 Selling, Thomas I., 445n Semistrong-form efficient market hypothesis, 228, 236–241 Sentiment indicators, 270–271, 366 Separation property, 164 Serial bonds, 307 Serial correlation, 235 Seyhun, H Nejat, 241, 251n Shareholders’ equity, 435 Sharpe, William F., 11, 133, 167–175, 202, 583, 583n, 592–595, 594n, 595n Sharpe ratio, 123–124, 133, 134, 584 portfolio, 159, 174–175, 584, 585–586, 588 Shefrin, Hersh, 258, 265 Shelf registration, 56 Shell Transport, 261, 262 Shiller, Robert, 236 Shleifer, Andrei, 242, 262, 620n Short hedge, 557 Short interest, 271 Short position, 547 Short sales, 72–75, 76, 241 Shumway, Tyler, 259 “Siamese twin” companies, 261, 262 Singer, Brian, 592n Single stock futures, 549 Sinking funds, 306–307 SIX (Switzerland), 68 www.freebookslides.com Size of firm See Firm size Skew, 122, 130 Small-firm effect, 237, 238, 241–242 Smart-beta ETFs, 212–213 Smith, Jeff, Smith, Randall, 412n SML See Security market line (SML) Snapchat, 57 Snap Inc., 57 SocGen (Société Générale), 30, 473 Social Security (SS), 682, 682n Soft dollars, 94 Solar City, 287 Solnik, B., 629n, 631n SONIA (Sterling Overnight Interbank Average Rate), 30, 31 Sonne, Paul, 457n Sony, 187 South Carolina Electric & Gas, 404 Southern Company, 404 South Sea bubble, 240 South Sea Company, 240 Southwest Airlines, 470 Sovereign debt crisis, 21, 281, 309–310, 363 S&P 100 option contracts (OEX), 478 S&P 500 big contract, 554n S&P 500 dividend yield, 562 S&P 500 option contracts (SPX), 478 Spatt, Chester, 60n, 64n Specialists, 61–65 Special-purpose entities (SPEs), 9, 458 Speculation, in futures, 555–557, 558 Speculative grade bonds, 304 Speidell, Lawrence S., 459n Sperling, Gene, 373n Spider (SPDR, Standard & Poor’s Depository Receipt), 95, 96 Spot-futures parity theorem, 561–562, 624 Spreads (futures), 558, 562–563 Spreads (options), 488–490 Sprint Corp., 357 Stambaugh, Robert F., 236 Standard deviation, 118, 124–125 Standard & Poor’s Composite 500 Stock Index (S&P 500), 43–44, 59, 60, 103, 135, 168n, 187, 196, 200, 202, 217, 222, 229, 231–232, 233, 244–245, 276, 336, 365, 413, 415, 702 cumulative value of $1 investment (1980–2018), 16 dividend yield on stocks, 562, 680 futures contract based on volatility (VIX), 523, 524 index funds, 90 index options, 478 as market value-weighted index, 43–44, 90 page 737 price-earnings (P/E) ratio on, 420–421 SPDR (Standard & Poor’s Depository Receipt), 95, 96 stock-index futures (E-Mini), 554–555, 561–562, 563–564, 650 Standard & Poor’s Corporation, 19, 281, 285, 324, 377 bond default risk, 304–306 Stock Guide, 460 Staples, www.freebookslides.com Starboard Value, Start-up stage, of industry life cycle, 381 Statement of cash flows, 436–438 StateStreet, 96 Statistical arbitrage, 649 Statman, Meir, 258, 259 Staunton, Mike, 136, 136n Stern Stewart, 441n Stickney, Clyde P., 445n Stiglitz, Joseph E., 227 Stochastic volatility model, 524 Stock exchanges, 64–65 Stock-index futures, 554–555, 561–562, 563–565 creating synthetic stock positions, 564–565 index arbitrage, 565 sample of, 564 Stock market analysts, See also Security analysis efficient market hypothesis and, 243–244 fundamental analysis, 230–231, 236–241, 362–363, 393, 394–395, 459–460 See also Financial statement analysis technical analysis, 229–230, 265–272, 393 Stock market crash of 1929, 76 Stock market crash of 1987, 31, 32, 531, 533–534, 631–633, 658, 660 Stock market flash crash of 2010, 66, 67, 98 Stock market indexes, 41–45 See also names of specific stock market indexes index options, 478 price-earnings ratio (P/E) on, 420–421 Stock market listings, 39, 40 Stock options, Stock selection, 638 Stock splits, price-weighted averages and, 42 Straddles, 486–488, 490 Straight bonds, 491, 492 Strebel, Paul J., 237 Strike price, 475–477 STRIPS (Separate Trading of Registered Interest and Principal of Securities), 302 Strong-form efficient market hypothesis, 228–229, 241 Stub value, 262 Stulz, R., 256n Style analysis, 129–130 hedge fund, 647, 652–653 mutual fund, 592–594 Style drift, 646 Subordination clauses, 307 Subprime mortgages, 18–20, 37, 311 Subrahmanyam, Avanidhar, 63n, 243 Substitute products, in industry analysis, 383 Substitution swaps, 346 Summers, Lawrence, 235, 260n SuperDot system, 65 Supply shocks, 368 Supply-side policies, 370–371 Support level, 229 Survivorship bias, 592, 657 Swaps, 474, 568–570 See also Credit default swaps (CDSs) and balance sheet restructuring, 569 www.freebookslides.com foreign exchange, 568 interest rate/bond, 346–347, 348, 568–570 swap dealers, 569–570 tax, 347 Symantec, 377, 404 Synthetic protective puts, 530 Systematic risk, 146–147, 168 in financial crisis of 2008–2009, 311 multifactor models, 202–206 Systemic risk, 15, 20, 21, 311 T T Rowe Price, 88 Tail risk, 121–122, 130, 658–660 Taleb, Nassim, 660 Tangible fixed assets, 435 Target Corporation, 187, 431–432 Target-date funds, 89 Tate, G., 257 Tax anticipation notes, 34 Taxation See also Tax shelters of bonds original-issue discounts (OID) bonds, 302–303 tax-exempt status of municipal bonds, 34–36 cutoff tax bracket, municipal bond, 35–36 efficient market hypothesis and, 232 of exchange-traded funds (ETFs), 98 flat tax, 672–673 of futures contracts, 555 as investor constraint, 697 of mutual fund income and capital gains, 94–95 preferred stock dividend exclusion, 40, 287 progressive tax, 675–676, 678–679 and savings/investment plans, 672–673 See also Tax shelters of tax swaps, 347 Tax Cuts and Jobs Act of 2017, 371, 417n, 434n, 437 Tax shelters, 674–681 benchmark, 674–675 capital gains, 679–680 defined benefit plans, 677, 693–694 defined contribution/401(k) plans, 147, 232, 677, 693–694 529 education plans, 683 Individual Retirement Accounts (IRAs), 674–675, 677–679, 681 sheltered vs unsheltered savings, 681 Tax swaps, 347 Tax-timing option, 680 Technical analysis, 229–230, 393 behavioral finance and, 265–272 disposition effect, 258, 265 sentiment indicators, 270–271, 366 trends and corrections, 265–270 warning concerning, 271–272 TED spread, 16–17, 17n, 21 Templeton, John, 247 Templeton Funds, 247 Term insurance, 694 www.freebookslides.com Term repos, 29 Term spread, 315–316 Term structure of interest rates, 311–316 Thaler, Richard H., 236, 256n, 257, 259, 261n, 262, 262n Third Point, Thomas, J., 239n Threats to entry, 383 3Com, 261–262 3M, 43 Tibor (Tokyo interbank offer rate), 30 Tick size, 33, 62, 63, 65, 243, 284, 284n Tikit Group, 457–458 Time diversification, 178–179 Time horizon bond bond maturity and interest rate sensitivity, 327–329 bond prices over time, 299–311 immunization strategy in passive bond management, 335–341 consumption timing and, 6–7 fallacy of time diversification, 178–179 holding-period return, 111 horizon analysis, 299, 347 investment horizon, 120–121, 696 market anomalies over time, 243 market timing and, 596–600 term structure of interest rates, 311–316 weak-form tests of market efficiency, 235–236 Times interest earned, 304, 443 Time spreads, 488–490 Time value (of an option), 508–510 Time Warner, 435n Time-weighted averages, 512, 581–582 Timmermann, A., 247 TIPS (Treasury Inflation Protected Securities), 33, 131, 288–289 TIPS, Inc., 358 Titman, Sheridan, 235 Tjornehoj, Jeff, 629 TMX (Toronto), 68 Tobin, James, 395 Tobin’s q, 395 Tokyo Disneyland, 288 Tong, Qing, 243 Total asset turnover (ATO), 442, 450 Toyota, 3–4, 7, 23, 217, 269–270 Toys “R” Us, 667 Trading securities See Securities markets Traditional retirement accounts, 678 Tranches, 19 Transparency, 8–9, 96, 646 Travelers, 43 Treasury bills (T-bills), 27–28 historical record of risk and return, 125–130 interest rate futures, 566–568 TED spread, 16–17, 17n, 21 yield calculation bank-discount method, 27–28 page 738 www.freebookslides.com bond-equivalent yield method, 28 as zero-coupon bonds, 302–303 Treasury bonds, 32–33 accrued interest and quoted prices, 284–285 characteristics, 283–285 historical record of risk and return, 125–130 interest rate futures, 566–568 STRIPS (Separate Trading of Registered Interest and Principal of Securities), 302 TIPS (Treasury Inflation Protected Securities), 33, 131, 288–289 yield to maturity, 32, 33 Treasury Inflation Protected Securities (TIPS), 33, 131, 288–289 Treasury notes, 32–33 characteristics, 283–285 interest rate futures, 566–568 Treasury stock, 435–436 Treasury strips (Separate Trading of Registered Interest and Principal of Securities), 302 Treynor, Jack L., 174–175, 583, 583n, 597, 597n Treynor’s measure, 584, 586–588 Trian, Trin statistic, 270 Triumph of the Optimists (Dimson et al.), 136, 136n Troughs, 371 Trueman, B., 243–244 Trump, Donald, 550 TSE (Tokyo Stock Exchange), 68, 69 TSX index (Toronto), 45 Tulip bubble, 240 Turnover (mutual fund), 94–95 Tuttle, Donald L., 690n Tversky, A., 257, 259n 12b-1 fees, 92–93, 101 Two-stage dividend discount model (DDM), 404–407 Tyco, 76 U UBS, 14, 30 Underwriters, 56 mortgage, 18–19 mutual fund, 91 security, 15, 56 Unemployment rate, 366 Uniform Securities Act of 1956, 76 Union Pacific Railroad, 207 Unique risk, 146–147, 168 UnitedHealth Group, 43 United States budget deficits, 11, 366 domestic net worth, fiscal policy, 369 household wealth, 3–4, 4n macroeconomic analysis, 365–366 monetary policy, 368, 369–370 See also Federal Reserve Board securities markets, 63–65 supply-side policies, 370–371 U.S Census Bureau, 391 U.S Department of Commerce, 449 www.freebookslides.com U.S Department of Labor, 697 U.S dollar LIBOR, 30, 31 U.S Federal Reserve Bank, 367–368 Board of Governors, Federal Reserve System, 369–370 U.S Securities and Exchange Commission (SEC), 241, 459, 463–464 EDGAR website, 394 establishment in 1934, 75 insider trading, 78, 228–229, 241 Madoff scandal and, 662 Office of Credit Ratings, 21 Regulation ATS, 62 Regulation NMS (National Market System), 63, 65 Rule 144A, 55 Rule 415, 56 securities issues and, 55, 56 tax impact of mutual fund portfolio turnover, 95 12b-1 fees, 92–93 website, 24 U.S Steel, 172, 173 United Technologies, 43 Unit investment trusts, 86 Units, commingled fund, 87 Universal banks, 14, 15 Universal life policy, 694 University of Chicago, CRSP (Center for Research in Security Prices), 44, 231–232, 231n University of Michigan Inflation Expectation data series (MICH), 143 Unmanaged investment companies, 86 V Valeant Pharmaceuticals, Value at risk (VaR), 121–122, 124, 130 Value firms, 129–130, 204, 242, 252 Value investing, 459–460 Value Line Investment Survey, 377, 403–408, 414–415, 417–420 Value premium, 204 Value trees, 510 Vanguard Group, 86, 88, 90, 96, 98, 99, 99n, 131, 207, 231, 677 Variable life policy, 694 Variance, 118 in mean-variance analysis, 123–125, 154–157 minimum-variance portfolio, 157–160 rate of return on two-risky-asset portfolio, 153 Vassalou, M., 242n Venture capital (VC), 15 Verizon, 43, 173 Visa, 43 Vishny, Robert W., 242, 260n, 620n Vmware, 377 Volatility exchange rate, 622, 623, 628–633 in option valuation, 508–512, 515–517, 522–524 stock market, 627 Volcker, Paul, 14, 21 Volcker Rule, 14, 21 Vulcan Materials Company, 470 page 739 www.freebookslides.com W Waddell & Reed Financial, 67 Waldmann, R., 260n Wallace, A., 202n Wall Street Journal, The, 1, 101, 232, 233, 234, 268, 284, 294, 373, 473, 547, 548, 566 Wall Street Journal Online, The, 27–28, 86, 270, 283–285, 311, 576–577 Walmart, 43, 172, 173, 227, 375, 441, 442 Walt Disney Co., 43, 52, 172, 173, 288, 442 Wang, Zhenyu, 202 Warrants, 494 Weak-form efficient market hypothesis, 228, 235–236 WEBS (World Equity Benchmark Shares), 95, 96 Wedge Partners, 412 Weighted-average cost of capital (WACC), 441, 441n Well-diversified portfolio, 208–209 mimicking portfolio, 209, 212 in practice, 210 Wellington Management, 86 Wermers, R R., 245, 247 Westerfield, Randolph W., 305n White, A., 523n White, H., 247 Whole-life insurance policy, 694 Wiggins, J B., 523n Wilshire 5000 index, 44, 99, 99n, 100, 244 Wolfson, M A., 225–226 Womack, K L., 244 Workout period, 346 World Bank, 288 WorldCom, 9, 76 World Cup, 288 Worthen, Ben, 457n X Xiao, Zhanbing, 213 Y Yahoo! Finance, 24, 52, 101, 143, 187, 222, 253, 266n, 278–279, 311, 324, 357, 373, 394, 431–432, 470, 503–504, 542, 666 Yankee bonds, 34, 287 Yield bond, 294–299 current yield, 296 default risk and, 307–309 equivalent taxable yield on municipal bonds, 35 inverse relationship with bond prices, 291–292, 327 realized compound return, 298–299 yield curve, 311–316 yield spread, 236, 309 yield to call, 296–297 yield-to-maturity, 294–296, 298–299, 301–302, 307–309 capital gains, 111 dividend, 39, 40, 111, 236, 680 earnings, 236, 420–421, 450 on money market instruments, 27–28, 31–32 Treasury bill www.freebookslides.com bank-discount method, 27–28 bond-equivalent yield method, 28 Yield curve, 311–316 expectations theory and, 311–314 liquidity preference theory and, 314, 315–316 synthesis of expectations and liquidity preference, 315–316 Yield ratio, municipal bond, 35–36 Yield spread, 236, 309 Yield to call, 296–297 Yield to maturity (YTM), 294–296 calculating, 294–296 default risk and, 307–309 holding-period return vs, 301–302 interest rate sensitivity, 327–329, 333 realized compound return vs., 298–299 Treasury bond, 32, 33 Z Zero-coupon bonds, 283 duration, 330, 333, 334 interest rate sensitivity, 328–329 Treasury bills as short-term, 302–303 Zero sum game, 547 Zhan, Xintong, 213 page 740 page 741 page 742 ... That Create Value INVESTMENTS Bodie, Kane, and Marcus Essentials of Investments Tenth Edition Bodie, Kane, and Marcus Investments Eleventh Edition Hirt and Block Fundamentals of Investment Management... Stern School of Business of New York University and has been Visiting Professor at the Faculty of Economics, University of Tokyo; Graduate School of Business, Harvard; Kennedy School of Government,... author | Marcus, Alan J., author Title: Essentials of investments / Zvi Bodie, Boston University, Alex Kane, University of California, San Diego, Alan J Marcus, Boston College Description: Eleventh