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Final PDF to printer Investments bod77178_fm_i-xxviii.indd i 04/21/17 03:02 PM Final PDF to printer The McGraw-Hill Education 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 Ross, Westerfield, Jaffe, and Jordan Saunders and Cornett Corporate Finance: Core Principles and Financial Institutions Management: Block, Hirt, and Danielsen Applications A Risk Management Approach Foundations of Financial Management Fifth Edition Ninth Edition Sixteenth Edition Ross, Westerfield, and Jordan Saunders and Cornett Brealey, Myers, and Allen Essentials of Corporate Finance Financial Markets and Institutions Principles of Corporate Finance Ninth Edition Sixth Edition Twelfth Edition Ross, Westerfield, and Jordan Brealey, Myers, and Allen Fundamentals of Corporate Finance International Finance Principles of Corporate Finance, Eleventh Edition Eun and Resnick Concise Edition International Financial Management Second Edition Shefrin Eighth Edition Behavioral Corporate Finance: Decisions Brealey, Myers, and Marcus that Create Value Fundamentals of Corporate Finance Second Edition Real Estate Ninth Edition Brueggeman and Fisher Investments Real Estate Finance and Investments Brooks FinGame Online 5.0 Bodie, Kane, and Marcus Fifteenth Edition Essentials of Investments Ling and Archer Bruner Tenth Edition Real Estate Principles: A Value Approach Case Studies in Finance: Managing for Fifth Edition Corporate Value Creation Bodie, Kane, and Marcus Eighth Edition Investments Eleventh Edition Financial Planning and Insurance Cornett, Adair, and Nofsinger Finance: Applications and Theory Hirt and Block Allen, Melone, Rosenbloom, Fourth Edition Fundamentals of Investment Management and Mahoney Tenth Edition Retirement Plans: 401(k)s, IRAs, and Other Cornett, Adair, and Nofsinger Deferred Compensation Approaches M: Finance Jordan, Miller, and Dolvin Eleventh Edition Third Edition Fundamentals of Investments: Valuation and Management Altfest DeMello Eighth Edition Personal Financial Planning Cases in Finance Second Edition Third Edition Stewart, Piros, and Hiesler Running Money: Professional Portfolio Harrington and Niehaus Grinblatt (editor) Management Risk Management and Insurance Stephen A. Ross, Mentor: Influence through First Edition Second Edition Generations Sundaram and Das Kapoor, Dlabay, Hughes, and Hart Grinblatt and Titman Derivatives: Principles and Practice Focus on Personal Finance: An Active Financial Markets and Corporate Second Edition Approach to Help You Develop Successful Strategy Financial Skills Second Edition Financial Institutions and Markets Fifth Edition Higgins Rose and Hudgins Kapoor, Dlabay, Hughes, and Hart Analysis for Financial Management Bank Management and Financial Services Personal Finance Eleventh Edition Ninth Edition Twelfth Edition Ross, Westerfield, Jaffe, and Jordan Rose and Marquis Walker and Walker Corporate Finance Financial Institutions and Markets Personal Finance: Building Your Future Eleventh Edition Eleventh Edition Second Edition bod77178_fm_i-xxviii.indd ii 04/21/17 03:02 PM Final PDF to printer Investments E L E V E N T H E D I T I O N ZVI BODIE Boston University ALEX KANE University of California, San Diego ALAN J. MARCUS Boston College bod77178_fm_i-xxviii.indd iii 04/21/17 03:02 PM Final PDF to printer INVESTMENTS, ELEVENTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014, 2011, and 2009. 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. 1 2 3 4 5 6 7 8 9 LWI 21 20 19 18 17 ISBN 978-1-259-27717-7 MHID 1-259-27717-8 Executive Brand Manager: Chuck Synovec Senior Product Developer: Noelle Bathurst Marketing Manager: Trina Maurer Core Content Project Manager: Kathryn D. Wright Senior Assessment Content Project Manager: Kristin Bradley Media Content Project Manager: Karen Jozefowicz Senior Buyer: Laura Fuller Senior Designer: Matt Diamond Lead Content Licensing Specialist: Beth Thole Cover Image: © marigold_88 Compositor: SPi Global Printer: LSC Communications 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: 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, [2018] Identifiers: LCCN 2017013354 | ISBN 9781259277177 (alk. paper) Subjects: LCSH: Investments. | Portfolio management. Classification: LCC HG4521 .B564 2018 | DDC 332.6—dc23 LC record available at https://lccn.loc.gov/2017013354 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 bod77178_fm_i-xxviii.indd iv 04/21/17 03:02 PM Final PDF to printer About the Authors ZVI BODIE ALEX KANE ALAN J. MARCUS Boston University University of California, Boston College San Diego Zvi Bodie is the Norman and Alan Marcus is the Mario J. Adele Barron Professor of Alex Kane is professor of Gabelli Professor of Finance Management at Boston Uni- finance and economics at the in the Carroll School of Man- versity. He holds a PhD from Graduate School of Interna- agement at Boston College. the Massachusetts Institute of tional Relations and Pacific He received his PhD in eco- Technology and has served Studies at the University of nomics from MIT. Professor on the finance faculty at the California, San Diego. He Marcus has been a visiting Harvard Business School has been visiting professor professor at the Athens Labo- and MIT’s Sloan School of at the Faculty of Economics, ratory of Business Admin- Management. Professor Bodie University of Tokyo; Graduate istration and at MIT’s Sloan has published widely on pen- School of Business, Harvard; School of Management and sion finance and investment Kennedy School of Govern- has served as a research asso- strategy in leading profes- ment, Harvard; and research ciate at the National Bureau sional journals. In cooperation associate, National Bureau of Economic Research. Pro- with the Research Foundation of Economic Research. An fessor Marcus has published of the CFA Institute, he has author of many articles in widely in the fields of capital recently produced a series of finance and management jour- markets and portfolio manage- Webcasts and a monograph nals, Professor Kane’s research ment. His consulting work entitled The Future of Life is mainly in corporate finance, has ranged from new-product Cycle Saving and Investing. portfolio management, and development to provision of capital markets, most recently expert testimony in utility rate in the measurement of mar- proceedings. He also spent ket volatility and pricing of two years at the Federal Home options. Loan Mortgage Corpora- tion (Freddie Mac), where he developed models of mortgage pricing and credit risk. He cur- rently serves on the Research Foundation Advisory Board of the CFA Institute. v bod77178_fm_i-xxviii.indd v 04/21/17 03:02 PM Final PDF to printer Brief Contents Preface xvi PART III Equilibrium in Capital PART I Markets 277 Introduction 1 9 1 The Capital Asset Pricing Model 277 The Investment Environment 1 10 2 Arbitrage Pricing Theory and Multifactor Asset Classes and Financial Instruments 27 Models of Risk and Return 309 3 11 How Securities Are Traded 57 The Efficient Market Hypothesis 333 4 12 Mutual Funds and Other Investment Behavioral Finance and Technical Companies 91 Analysis 373 PART II 13 Empirical Evidence on Security Returns 397 Portfolio Theory and PART IV Practice 117 Fixed-Income Securities 425 5 Risk, Return, and the Historical Record 117 14 6 Bond Prices and Yields 425 Capital Allocation to Risky Assets 157 15 7 The Term Structure of Interest Rates 467 Optimal Risky Portfolios 193 16 8 Managing Bond Portfolios 495 Index Models 245 vi bod77178_fm_i-xxviii.indd vi 04/21/17 03:02 PM Final PDF to printer Brief Contents PART V PART VII Security Analysis 537 Applied Portfolio 17 Management 811 Macroeconomic and Industry Analysis 537 24 18 Portfolio Performance Evaluation 811 Equity Valuation Models 569 25 19 International Diversification 853 Financial Statement Analysis 613 26 Hedge Funds 881 PART VI 27 The Theory of Active Portfolio Options, Futures, and Other Management 907 28 Derivatives 657 Investment Policy and the Framework of the 20 CFA Institute 931 Options Markets: Introduction 657 21 REFERENCES TO CFA PROBLEMS 967 Option Valuation 699 GLOSSARY G-1 22 NAME INDEX I-1 Futures Markets 747 23 SUBJECT INDEX I-4 Futures, Swaps, and Risk Management 775 FORMULAS F-1 vii bod77178_fm_i-xxviii.indd vii 04/21/17 03:02 PM Final PDF to printer Contents Preface xvi and Reverses / Federal Funds / Brokers’ Calls / The LIBOR Market / Yields on Money Market PART I Instruments 2.2 The Bond Market 33 Introduction 1 Treasury Notes and Bonds / Inflation-Protected Treasury Bonds / Federal Agency Debt / International Bonds / Chapter 1 Municipal Bonds / Corporate Bonds / Mortgages and Mortgage-Backed Securities The Investment Environment 1 2.3 Equity Securities 40 1.1 Real Assets versus Financial Assets 2 Common Stock as Ownership Shares / Characteristics of 1.2 Financial Assets 3 Common Stock / Stock Market Listings / Preferred Stock / 1.3 Financial Markets and the Economy 5 Depositary Receipts The Informational Role of Financial Markets / 2.4 Stock and Bond Market Indexes 43 Consumption Timing / Allocation of Risk / Separation of Stock Market Indexes / Dow Jones Industrial Average / Ownership and Management / Corporate Governance The Standard & Poor’s 500 Index / Other U.S. Market- and Corporate Ethics Value Indexes / Equally Weighted Indexes / Foreign 1.4 The Investment Process 8 and International Stock Market Indexes / Bond Market 1.5 Markets Are Competitive 9 Indicators The Risk–Return Trade-Off / Efficient Markets 2.5 Derivative Markets 50 1.6 The Players 11 Options / Futures Contracts Financial Intermediaries / Investment Bankers / Venture End of Chapter Material 52–56 Capital and Private Equity 1.7 The Financial Crisis of 2008 15 Chapter 3 Antecedents of the Crisis / Changes in Housing Finance / Mortgage Derivatives / Credit Default Swaps / The Rise of How Securities Are Traded 57 Systemic Risk / The Shoe Drops / The Dodd-Frank Reform Act 3.1 How Firms Issue Securities 57 1.8 Outline of the Text 23 Privately Held Firms / Publicly Traded Companies / End of Chapter Material 23–26 Shelf Registration / Initial Public Offerings 3.2 How Securities Are Traded 62 Chapter 2 Types of Markets Asset Classes and Financial Instruments 27 Direct Search Markets / Brokered Markets / Dealer Markets / Auction Markets 2.1 The Money Market 27 Treasury Bills / Certificates of Deposit / Commercial Types of Orders Paper / Bankers’ Acceptances / Eurodollars / Repos Market Orders / Price-Contingent Orders viii bod77178_fm_i-xxviii.indd viii 04/21/17 03:02 PM Final PDF to printer Contents Trading Mechanisms PART II Dealer Markets / Electronic Communication Networks Portfolio Theory (ECNs) / Specialist Markets 3.3 The Rise of Electronic Trading 66 and Practice 117 3.4 U.S. Markets 68 NASDAQ / The New York Stock Exchange / ECNs Chapter 5 3.5 New Trading Strategies 70 Risk, Return, and the Historical Record 117 Algorithmic Trading / High-Frequency Trading / Dark Pools / Bond Trading 5.1 Determinants of the Level of Interest Rates 118 3.6 Globalization of Stock Markets 73 Real and Nominal Rates of Interest / The Equilibrium Real Rate of Interest / The Equilibrium Nominal Rate of 3.7 Trading Costs 74 Interest / Taxes and the Real Rate of Interest 3.8 Buying on Margin 75 5.2 Comparing Rates of Return for Different Holding 3.9 Short Sales 78 Periods 121 3.10 Regulation of Securities Markets 82 Annual Percentage Rates / Continuous Compounding Self-Regulation / The Sarbanes-Oxley Act / Insider Trading 5.3 Bills and Inflation, 1926–2015 124 5.4 Risk and Risk Premiums 126 End of Chapter Material 86–90 Holding-Period Returns / Expected Return and Standard Deviation / Excess Returns and Risk Premiums Chapter 4 5.5 Time Series Analysis of Past Rates of Return 129 Time Series versus Scenario Analysis / Expected Returns Mutual Funds and Other Investment and the Arithmetic Average / The Geometric (Time- Companies 91 Weighted) Average Return / Variance and Standard 4.1 Investment Companies 91 Deviation / Mean and Standard Deviation Estimates from Higher-Frequency Observations / The Reward-to- 4.2 Types of Investment Companies 92 Volatility (Sharpe) Ratio Unit Investment Trusts / Managed Investment Companies / Other Investment Organizations 5.6 The Normal Distribution 134 Commingled Funds / Real Estate Investment Trusts 5.7 Deviations from Normality and Alternative Risk (REITs) / Hedge Funds Measures 136 Value at Risk / Expected Shortfall / Lower Partial 4.3 Mutual Funds 95 Standard Deviation and the Sortino Ratio / Relative Investment Policies Frequency of Large, Negative 3-Sigma Returns Money Market Funds / Equity Funds / Sector Funds / Bond Funds / International Funds / Balanced 5.8 Historic Returns on Risky Portfolios 140 Funds / Asset Allocation and Flexible Funds / A Global View of the Historical Record Index Funds 5.9 Normality and Long-Term Investments 147 How Funds Are Sold Short-Run versus Long-Run Risk / Forecasts for the Long Haul 4.4 Costs of Investing in Mutual Funds 98 Fee Structure End of Chapter Material 151–156 Operating Expenses / Front-End Load / Back-End Chapter 6 Load / 12b-1 Charges Fees and Mutual Fund Returns Capital Allocation to Risky Assets 157 4.5 Taxation of Mutual Fund Income 102 6.1 Risk and Risk Aversion 158 4.6 Exchange-Traded Funds 103 Risk, Speculation, and Gambling / Risk Aversion and 4.7 Mutual Fund Investment Performance: Utility Values / Estimating Risk Aversion A First Look 106 6.2 Capital Allocation across Risky and Risk-Free 4.8 Information on Mutual Funds 109 Portfolios 164 End of Chapter Material 112–116 6.3 The Risk-Free Asset 166 ix bod77178_fm_i-xxviii.indd ix 04/21/17 03:02 PM
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