PART ONE BACKGROUND

1 Understanding Investments

An Overall Perspective on Investing

Establishing a Framework for Investing

Some Definitions

A Perspective on Investing in Financial Assets

Why Do We Invest?

The Importance of Studying Investments

The Personal Aspects

Investments as a Profession

Understanding the Investment Decision Process

The Basis of Investment Decisions—Return and Risk

Structuring the Decision Process

Important Considerations in the Investment Decision Process for Today's Investors

The Great Unknown

The Global Investments Arena

The Importance of the Internet

Individual Investors Versus Institutional Investors

Ethics in Investing

Organizing the Text

Summary

2 Investment Alternatives

Organizing Financial Assets

Direct Investing

An International Perspective

Nonmarketable Financial Assets

Money Market Securities

The Treasury Bill

Money Market Rates

Fixed-Income Securities

Bonds

Types of Bonds

Asset-Backed Securities

Rates on Fixed-Income Securities

Equity Securities

Preferred Stock

Common Stock

Investing Internationally in Equities

Derivative Securities

Options

Futures Contracts

A Final Note

Summary

3 Indirect Investing

Investing Indirectly

What Is an Investment Company?

Types of Investment Companies

Unit Investment Trusts

Exchange-Traded Funds(ETFs)

Closed-End Investment Companies

Open-End Investment Companies(Mutual Funds)

Types of Mutual Funds

Money Market Funds

Equity Funds,Bond Funds,and Hybrid Funds

The Mechanics of Investing Indirectly

Closed-End Funds

Mutual Funds

Exchange-Traded Funds

Investment Company Performance

Measures of Fund Performance

Morningstar Ratings

Benchmarks

How Important are Expenses in Affecting Performance?

Some Conclusions About Fund Performance

Investing Internationally Through Investment Companies

Fund Categories for International Investing

The Future of Indirect Investing

Fund Supermarkets

Separately Managed Accounts

Hedge Funds

Summary

4 Securities Markets

The Importance of Financial Markets

The Primary Markets

Initial Public Offerings(IPOs)

The Investment Banker

Global Investment Banking

Private Placements

The Secondary Markets

U.S. Securities Markets for the Trading of Equities

The New York Stock Exchange

American Stock Exchange

The NASDAQ Stock Market

Comparisons of the Three Major Equity Markets

Regional Exchanges

Over-the-Counter Stocks

Electronic Communications Networks(ECNs)

In-House Trading

Foreign Markets

Stock Market Indexes

The Dow Jones Averages

Standard ＆ Poor's Stock Price Indexes

Understanding a Capitalization-Weighted Index

NASDAQ Indexes

Other Indexes

Relationships Between Domestic Stock Indexes

Foreign Stock Market Indicators

Bond Markets

Treasury Bonds

Agency Bonds

Municipal Bonds

Corporate Bonds

The Changing Bond Market

Derivatives Markets

The Changing Securities Markets

The National Market System(NMS)

The Intermarket Trading System(ITS)

Changes in U.S. Markets

The Globalization of Securities Markets

Summary

5 How Securities Are Traded

Brokerage Transactions

Brokerage Firms

Brokerage Accounts

Commissions

Investing Without a Broker

How Orders Work

Orders on the Organized Exchanges

Orders in the NASDAQ Stock Market

Decimalization of Stock Prices

Types of Orders

Clearing Procedures

Investor Protection in the Securities Markets

Government Regulation

Self-Regulation

Other Investor Protections

Margin

How Margin Accounts Can be Used

Margin Requirements and Obligations

Margin Requirements on Other Securities

Some Misconceptions About Margin

Short Sales

Selling Short as an Investor

Summary

PART TWO PORTFOLIO AND CAPITAL MARKET THEORY

6 Returns and Risks from Investing

An Overview

Return

The Two Components of Return

Risk

Sources of Risk

Measuring Returns

Total Return

Return Relative

Cumulative Wealth Index

Taking a Global Perspective

International Returns and Currency Risk

Summary Statistics for Returns

Arithmetic Mean

Geometric Mean

Arithmetic Mean Versus Geometric Mean

Inflation-Adjusted Returns

Measuring Risk

Variance and Standard Deviation

Risk Premiums

Realized Returns and Risks from Investing

Total Returns and Standard Deviations for the Major Financial Assets

Cumulative Wealth Indexes

The Components of Cumulative Wealth

Compounding and Discounting

Summary

7 Portfolio Theory

Dealing with Uncertainty

Using Probabilities

Probability Distributions

Calculating Expected Return for a Security

Calculating Risk for a Security

Introduction to Modern Portfolio Theory(MPT)

Portfolio Return and Risk

Portfolio Expected Return

Portfolio Risk

Analyzing Portfolio Risk

Risk Reduction—The Insurance Principle

Diversification

The Components of Portfolio Risk

The Correlation Coefficient

Covariance

Relating the Correlation Coefficient and the Covariance

Calculating Portfolio Risk

The Two-Security Case

The n-Security Case

The Importance of Covariance

Obtaining the Data

Simplifying the Markowitz Calculations

Summary

8 Portfolio Selection

Building a Portfolio Using Markowitz Principles

Identifying Optimal Risk-Return Combinations

Selecting an Optimal Portfolio of Risky Assets

The Global Perspective—International Diversification

Some Important Conclusions About the Markowitz Model

Alternative Methods of Obtaining the Efficient Frontier

The Single-Index Model

Multi-Index Models

Selecting Optimal Asset Classes—The Asset Allocation Decision

Some Major Asset Classes

Combining Asset Classes

Asset Allocation and the Individual Investor

Owning Stocks and Bonds

Return and Risk Combinations

Life-Cycle Analysis

The Impact of Diversification on Risk

Systematic and Nonsystematic Risk

How Many Securities are Enough to Diversify Properly?

The Implications of Reducing Risk by Holding Portfolios

Summary

9 Asset Pricing Models

Capital Market Theory

Capital Market Theory Assumptions

Introduction of the Risk-Free Asset

Risk-Free Borrowing and Lending

The Equilibrium Return-Risk Trade-off

The Capital Market Line

The Security Market Line

Beta

The CAPM's Expected Return—Beta Relationship

Over-and-Undervalued Securities

Estimating the SML

Estimating Beta

Tests of the.CAPM

Arbitrage Pricing Theory

The Law of One Price

Assumptions of APT

Factor Models

Understanding the APT Model

Identifying the Factors

Using APT in Investment Decisions

Some Conclusions about Asset Pricing

Summary

PART THREE COMMON STOCKS:ANALYSIS,VALUATION,AND MANAGEMENT

10 Common Stock Valuation

Overview

Discounted Cash Flow Techniques

Two DCF Approaches

The Dividend Discount Model

Dividends Dividends—What about Capital Gains?

The Dividend Discount Model in Practice

Other Discounted Cash Flow Approaches

Intrinsic Value and Market Price

Relative Valuation Techniques

The P/E Ratio or Earnings Multiplier Approach

Price/Book Value

Price/Sales Ratio(PRS)

Economic Value Added

Which Approach to Use?

Bursting the Bubble on New Economy Stocks—A Lesson in Valuation

Some Final Thoughts on Valuation

Summary

11 Common Stocks:Analysis and Strategy

Taking a Global Perspective

Analyzing Some Important Issues Involving Common Stocks

The Impact of the Overall Market on Individual Stocks

The Required Rate of Return

Building Stock Portfolios

The Passive Strategy

Buy-and-Hold Strategy

Index Funds

The Active Strategy

Security Selection

Sector Rotation

Market Timing

Rational Markets and Active Strategies

A Simple Strategy—The Coffeehouse Portfolio

Summary

12 Market Efficiency

Overview

The Concept of an Efficient Market

What is an Efficient Market?

Why The U.S. Stock Market can be Expected to be Efficient

The International Perspective

Forms of Market Efficiency

How to Test for Market Efficiency

Weak-Form Tests

Semistrong-Form Tests

Strong-Form Evidence

Behavioral Finance and Market Anomalies

Earnings Announcements

Low P/E Ratios

The Size Effect

The January Effect

The Value Line Ranking System

Other Anomalies

Some Conclusions about Market Efficiency

Data Mining

Some Remaining Issues

Behavioral Finance and Efficient Markets

A Final Argument for Market Efficiency

Summary

PART FOUR SECURITY ANALYSIS

13 Economy/Market Analysis

Taking a Global Perspective

Assessing the Economy

The Business Cycle

Forecasts of the Economy

Understanding the Stock Market

What Do We Mean by the "Market"?

Making Market Forecasts

Focus on the Important Variables

Using the Business Cycle to Make Market Forecasts

Other Approaches to Assessing the Market's Direction

Summary

14 Sector/Industry Analysis

What Is an Industry?

Classifying Industries

A New Classification System—NAICS

Other Industry Classifications

The Importance of Sector/Industry Analysis

Why Industry Analysis is Important Over the Long Run

Industry Performance Over Shorter Periods

How One Industry Can Have a Major Impact on Investors—The Telecom Industry

Cross-Sectional Volatility Has Increased

Analyzing Sectors/Industries

The Industry Life Cycle

Qualitative Aspects of Industry Analysis

Using Sector/Industry Analysis as an Investor

Sector Rotation

Evaluating Future Industry Prospects

Business Cycle Analysis

Picking Industries for Next Year

Summary

15 Company Analysis

Fundamental Analysis

The Accounting Aspects of Earnings

The Financial Statements

The Problems with EPS

Has the Situation Improved?

The Global Arena—International Accounting

Analyzing a Company's Profitability

Analyzing Return on Equity(ROE)

Analyzing Return on Assets(ROA)

Using ROE—Estimating the Internal(Sustainable)Growth Rate

Earnings Estimates

A Forecast of EPS

The Accuracy of Earnings Forecasts

Earnings Surprises

Earnings Guidance

The Earnings Game

Useful Information for Investors about Earnings Estimates

Sales Growth—An Alternative to Earnings

The P/E Ratio

Which P/E Ratio is Being Used?

Determinants of the P/E Ratio

Why P/E Ratios Vary Among Companies

The PEG Ratio

Fundamental Security Analysis in Practice

Summary

16 Technical Analysis

What Is Technical Analysis?

A Framework for Technical Analysis

Stock Price and Volume Techniques

The Dow Theory

Charts of Price Patterns

Moving Averages

Relative Strength

Using the Computer for Technical Analysis

Technical Indicators

Breadth Indicators

Sentiment Indicators

Testing Technical Analysis Strategies

The EBB and Flow of Technical Analysis

Some Conclusions about Technical Analysis

Summary

PART FIVE FIXED-INCOME SECURITIES:ANALYSIS, VALUATION,AND MANAGEMENT

17 Bond Yields and Prices

Bond Yields

The Basic Components of Interest Rates

Measuring Bond Yields

Bond Prices

The Valuation Principle

Bond Valuation

Bond Price Changes

Bond Price Changes Over Time

Bond Price Changes as a Result of Interest Rate Changes

Measuring Bond Price Volatility: Duration

Summary

18 Bonds:Analysis and Strategy

Why Buy Bonds?

Buying Foreign Bonds

Important Considerations in Managing a Bond Portfolio

Understanding the Bond Market

The Term Structure of Interest Rates

The Risk Structure of Interest Rates—Yield Spreads

Bond Strategies

Passive Management Strategies

Immunization—A Structured Portfolio Strategy

Active Management Strategies

Building a Fixed-Income Portfolio

Conservative Investors

Aggressive Investors

The International Perspective

Summary

PART SIX DERIVATIVE SECURITIES

19 Options

Why Have Derivative Securities?

Why Options Markets?

Introduction to Options

Understanding Options

Options Terminology

How Options Work

The Mechanics of Trading

Payoffs and Profits from Basic Option Positions

Calls

Puts

Some Basic Options Strategies

Covered Calls

Protective Puts

Portfolio Insurance

Option Valuation

A General Framework

Intrinsic Values and Time Values

Boundaries on Option Prices

The Black-Scholes Model

Put Option Valuation

Summarizing the Factors Affecting Options Prices

Hedge Ratios

Using the Black-Scholes Model

An Investor's Perspective on Puts and Calls

What Puts and Calls Mean to Investors

The Evolutionary Use of Options

Stock-Index Options

The Basics of Stock-Index Options

Strategies with Stock-Index Options

The Popularity of Stock-Index Options

Summary

20 Futures

Understanding Futures Markets

Why Futures Markets ?

Current U.S. Futures Markets

Foreign Futures Markets

Futures Contracts

The Structure of Futures Markets

Futures Exchanges

The Clearinghouse

The Mechanics of Trading

Basic Procedures

Margin

Using Futures Contracts

Hedgers

How to Hedge with Futures

Speculators

Financial Futures

Interest Rate Futures

Stock-Index Futures

Single Stock Futures

Summary

PART SEVEN INVESTMENT MANAGEMENT

21 Portfolio Management

Portfolio Management as a Process

Individual Investors Versus Institutional Investors

Formulate an Appropriate Investment Policy

Objectives

Constraints and Preferences

Determine and Quantify Capital Market Expectations

Forming Expectations

Rate of Return Assumptions

Developing and Implementing Investing Strategies

Asset Allocation

Portfolio Optimization

Monitor Market Conditions and Investor Circumstances

Monitoring Market Conditions

Changes in Investor's Circumstances

Rebalancing the Portfolio

Performance Measurement

Summary

22 Evaluation of Investment Performance

A Framework for Evaluating and Assessing Portfolio Performance

Performance Measurement Issues

Three Questions to Answer in Measuring Portfolio Performance

Return Calculations

Risk Considerations

Performance Benchmarks and Performance Universes

Performance Universes

Performance Benchmarks

Risk-Adjusted Measures of Performance

The Sharpe Performance Measure

The Treynor Performance Measure

Jensen's Differential Return Measure

M2

Style Analysis and Performance Attribution

Style Analysis

Performance Attribution

Money Managers and Performance Presentations

An Overview on Performance Evaluation

Summary