Investment Analysis and Portfolio Management

820 Pages·2019·32.23 MB·english

by  Frank K. Reilly

Reilly Brown Leeds Reilly Brown Leeds
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Eleventh
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F r e q u e n t ly u s e d s y m b o l s a n d t e r m s
a alpha coefficient, a measure of a portfolio’s k required rate of return.
“value added” return. £ pound (United Kingdom currency).
ABS asset-backed securities. NAV net asset value.
APT arbitrage pricing theory. OAS option-adjusted spread.
AUM assets under management. P price of a share of stock or put option; P is
0
b beta coefficient, a measure of an asset’s the current price.
systematic riskiness. P/BV price/book value ratio.
C call option value. P/CF price/cash flow ratio.
CAPM capital asset pricing model. P/E price/earnings ratio.
CAR cumulative average residuals. PPP purchasing power parity.
CF cash flow; CF is cash flow in period t. P/S price/sales ratio.
t
CML capital market line. PV present value.
Cov covariance of the returns between assets i PVIF present value interest factor for a lump
ij
and j. sum.
D dividend per share of stock; D is dividend PVIFA present value interest factor for an annuity.
t
per share during period t. r correlation coefficient between assets i
ij
D Macaulay duration measure of portfolio p. and j.
p
DDM dividend discount model. RFR rate of return on a risk-free asset.
€ euro currency. ROA return on assets.
EBIT earnings before interest and taxes. ROE return on equity.
EBITDA earnings before interest, taxes, deprecia- RR fraction of a firm’s earnings retained rather
tion, and amortization. than paid out. It is equal to (I – D/E),
EMH efficient market hypothesis. where D/E is the ratio of dividends (D) to
EPS earnings per share. earnings (E).
E(R) expected return; E(R)is the expected S Sharpe ratio portfolio performance
t p
return during period t. measure.
ETY equivalent taxable yield. SMB size (“small minus big”) risk factor.
F futures or forward contract delivery price. SML security market line.
FV future value. Σ summation sign (capital sigma).
FVIF future value interest factor for a lump sum. s standard deviation (lowercase sigma).
FVIFA future value interest factor for an annuity. s covariance between returns for security i
ij
FX foreign exchange. and j.
GM geometric mean. t tax rate or time when used as a subscript
g growth rate in earnings, dividends, or (e.g., D is the dividend in a year t).
t
stock prices. T time to expiration.
h hedge ratio. TE tracking error.
HML value-growth (“high minus low”) risk factor. V value of an asset; V is the value of asset j.
j
HPR holding period return. W proportion of portfolio invested in asset i.
i
HPY holding period yield. WACC weighted average cost of capital.
I rate of inflation. E(I) is the expected rate X option of exercise price.
of inflation. ¥ yen (Japanese currency).
IR information ratio portfolio performance YTC yield to call.
p
measure. YTM yield to maturity.
MBS mortgage-backed securities.
62997_end02-03_ptg01_hires.indd 2 24/02/18 6:24 PM
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Investment Analysis &
Portfolio Management
ELEVENTH EDITION
FRANK K. REILLY
University of Notre Dame
KEITH C. BROWN
University of Texas at Austin
SANFORD J. LEEDS
University of Texas at Austin
Australia Brazil Mexico Singapore UnitedKingdom UnitedStates
InvestmentAnalysis&Portfolio ©2019,2012CengageLearning,Inc.
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Printed in the United States of America
Print Number: 01 Print Year: 2018
Tomybestfriend&wife,
Therese,
andthegreatestgiftsand
sourcesofourhappiness,
FrankK.III,Charlotte,andLauren
ClarenceR.II,Michelle,Sophie,andCara
ThereseB.andDeniseZ.
EdgarB.,Lisa,Kayleigh,MadisonJ.T.,Francesca,andAlessandra
—F.K.R.
ToSheryl,Alexander,andAndrew,whomakeitallworthwhile
—K.C.B.
ToJenny,Jay,John,andGenet,whobringmeaningandhappinesstomylife.
—S.J.L.
Brief Contents
Preface xi
Acknowledgments xvii
About the Authors xxi
PART1 The Investment Background 1
CHAPTER 1 The Investment Setting 3
CHAPTER 2 Asset Allocation and Security Selection 33
CHAPTER 3 Organization and Functioning of Securities Markets 69
CHAPTER 4 Security Market Indexes and Index Funds 95
PART2 Developments in Investment Theory 123
CHAPTER 5 Efficient Capital Markets, Behavioral Finance, and
Technical Analysis 125
CHAPTER 6 An Introduction to Portfolio Management 171
CHAPTER 7 Asset Pricing Models 209
PART3 Valuation and Management of Common Stocks 249
CHAPTER 8 Equity Valuation 251
CHAPTER 9 The Top-Down Approach to Market, Industry, and
Company Analysis 295
CHAPTER10 The Practice of Fundamental Investing 343
CHAPTER11 Equity Portfolio Management Strategies 379
PART4 Valuation and Management of Bonds 421
CHAPTER12 Bond Fundamentals and Valuation 423
CHAPTER13 Bond Analysis and Portfolio Management Strategies 465
PART5 Derivative Security Analysis 517
CHAPTER14 An Introduction to Derivative Markets and Securities 519
CHAPTER15 Forward, Futures, and Swap Contracts 559
CHAPTER16 Option Contracts 603
iv
BriefContents v
PART6 Analysis and Evaluation of Asset Management 645
CHAPTER17 Professional Portfolio Management, Alternative Assets,
and Industry Ethics 647
CHAPTER18 Evaluation of Portfolio Performance 693
Appendix A The CFA® Charter 741
Appendix B Code of Ethics and Standards of Professional
Conduct 743
Appendix C Interest Tables 745
Appendix D Standard Normal Probabilities 749
Comprehensive References List 750
Glossary 762
Index 774
Contents
Preface ........................................ xi TheImportanceofAssetAllocation 44
Acknowledgments .............................xvii InvestmentReturnsafterTaxesandInflation46,Returns
About the Authors............................. xxi andRisksofDifferentAssetClasses46,AssetAllocation
Summary48
TheCaseforGlobalInvestments 49
PART 1 The Investment Background 1
RelativeSizeofU.S.FinancialMarkets50,RatesofReturn
onU.S.andForeignSecurities51,RiskofDiversified
CHAPTER 1 CountryInvestments51
The Investment Setting......................... 3
HistoricalRisk-ReturnsonAlternativeInvestments 56
WhatIsanInvestment? 3 WorldPortfolioPerformance56,ArtandAntiques59,
InvestmentDefined4 RealEstate60
MeasuresofReturnandRisk 5 Chapter2Appendix:
MeasuresofHistoricalRatesofReturn5,Computing A.Covariance 67
MeanHistoricalReturns7,CalculatingExpectedRatesof
B.Correlation 67
Return10,MeasuringtheRiskofExpectedRatesof
Return12,RiskMeasuresforHistoricalReturns 14
CHAPTER 3
DeterminantsofRequiredRatesofReturn 14
Organization and Functioning of Securities
TheRealRisk-FreeRate15,FactorsInfluencingthe
Markets.................................... 69
NominalRisk-FreeRate(NRFR)16,RiskPremium18,
RiskPremiumandPortfolioTheory20,Fundamental WhatIsaMarket? 70
RiskversusSystematicRisk21,SummaryofRequired CharacteristicsofaGoodMarket70,DecimalPricing71,
RateofReturn21 OrganizationoftheSecurities Market71
RelationshipbetweenRiskandReturn 22 PrimaryCapitalMarkets 72
MovementsalongtheSML22,ChangesintheSlopeof GovernmentBondIssues72,MunicipalBondIssues72,
theSML23,ChangesinCapitalMarketConditions or CorporateBondIssues72,CorporateStockIssues73,
ExpectedInflation24,Summary ofChangesinthe PrivatePlacementsandRule144A74
RequiredRateofReturn26 SecondaryFinancialMarkets 74
WhySecondaryMarketsAreImportant75,Secondary
Chapter1Appendix:ComputationofVarianceandStandard
BondMarkets75,FinancialFutures75,SecondaryEquity
Deviation 30
Markets76,ExchangeMarket-Makers 78
ClassificationofU.S.SecondaryEquityMarkets 78
CHAPTER 2
PrimaryListingMarkets78,TheSignificantTransitionof
Asset Allocation and Security Selection......... 33
theU.S.EquityMarkets80
IndividualInvestorLifeCycle 34
AlternativeTypesofOrdersAvailable 85
ThePreliminaries 34,InvestmentStrategiesoveran
MarketOrders85,LimitOrders86,Special Orders86,
Investor’sLifetime35,LifeCycleInvestmentGoals36
MarginTransactions86,ShortSales88,ExchangeMerger
ThePortfolioManagementProcess 37 Mania90
TheNeedforaPolicyStatement 38
UnderstandingandArticulatingRealisticInvestorGoals CHAPTER 4
38,Standards forEvaluatingPortfolioPerformance39, Security Market Indexes and Index Funds ...... 95
OtherBenefits39
UsesofSecurityMarketIndexes 96
InputtothePolicyStatement 40
Differentiating FactorsinConstructingMarket
InvestmentObjectives40,InvestmentConstraints42
Indexes 97
ConstructingthePolicyStatement 44 TheSample97,WeightingSampleMembers97,
GeneralGuidelines44,SomeCommonMistakes 44 ComputationalProcedure97
vi