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Final PDF to printer Investments bboodd6611667711__ffmm__ii--xxxxvviiiiii..iinndddd ii 77//3311//1133 77::2222 PPMM Final PDF to printer 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 Ross, Westerfield, Jaffe, and Jordan Rose and Marquis Corporate Finance: Core Principles Financial Institutions and Markets Block, Hirt, and Danielsen and Applications Eleventh Edition Foundations of Financial Management Fourth Edition Fifteenth Edition Saunders and Cornett Ross, Westerfield, and Jordan Financial Institutions Management: A Risk Brealey, Myers, and Allen Essentials of Corporate Finance Management Approach Principles of Corporate Finance Eighth Edition Eighth Edition Eleventh Edition Ross, Westerfield, and Jordan Saunders and Cornett Brealey, Myers, and Allen Fundamentals of Corporate Finance Financial Markets and Institutions Principles of Corporate Finance, Tenth Edition Fifth Edition Concise Edition Second Edition Shefrin International Finance Behavioral Corporate Finance: Decisions Brealey, Myers, and Marcus that Create Value Eun and Resnick Fundamentals of Corporate Finance First Edition International Financial Management Seventh Edition Sixth Edition White Brooks Financial Analysis with an Electronic Real Estate FinGame Online 5.0 Calculator Bruner Sixth Edition Brueggeman and Fisher Case Studies in Finance: Managing for Real Estate Finance and Investments Corporate Value Creation Investments Fourteenth Edition Seventh Edition Bodie, Kane, and Marcus Ling and Archer Essentials of Investments Real Estate Principles: A Value Approach Cornett, Adair, and Nofsinger Finance: Applications and Theory Ninth Edition Fourth Edition Second Edition Bodie, Kane, and Marcus Financial Planning and Insurance Investments Cornett, Adair, and Nofsinger M: Finance Tenth Edition Allen, Melone, Rosenbloom, and Mahoney Retirement Plans: 401(k)s, IRAs, and Other Second Edition Hirt and Block Deferred Compensation Approaches DeMello Fundamentals of Investment Management Eleventh Edition Cases in Finance Tenth Edition Altfest Second Edition Jordan and Miller Personal Financial Planning Grinblatt (editor) Fundamentals of Investments: Valuation First Edition Stephen A. Ross, Mentor: Influence through and Management Generations Sixth Edition Harrington and Niehaus Risk Management and Insurance Grinblatt and Titman Stewart, Piros, and Hiesler Second Edition Financial Markets and Corporate Strategy Running Money: Professional Portfolio Second Edition Management Kapoor, Dlabay, and Hughes First Edition Focus on Personal Finance: An Active Higgins Approach to Help You Develop Successful Analysis for Financial Management Sundaram and Das Financial Skills Tenth Edition Derivatives: Principles and Practice Fourth Edition First Edition Kellison Kapoor, Dlabay, and Hughes Theory of Interest Financial Institutions and Markets Personal Finance Third Edition Tenth Edition Rose and Hudgins Ross, Westerfield, and Jaffe Bank Management and Financial Walker and Walker Corporate Finance Services Personal Finance: Building Your Future Tenth Edition Ninth Edition First Edition bboodd6611667711__ffmm__ii--xxxxvviiiiii..iinndddd iiii 77//3311//1133 77::2222 PPMM Final PDF to printer Investments T 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 bboodd6611667711__ffmm__ii--xxxxvviiiiii..iinndddd iiiiii 77//3311//1133 77::2222 PPMM Final PDF to printer INVESTMENTS, TENTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2014 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2011, 2009, and 2008. 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 0 DOW/DOW 1 0 9 8 7 6 5 4 3 ISBN 978-0-07-786167-4 MHID 0-07-786167-1 Senior Vice President, Products & Markets: Kurt L. Strand Vice President, Content Production & Technology Services: Kimberly Meriwether David Managing Director: Douglas Reiner Executive Brand Manager: Chuck Synovec Executive Director of Development: Ann Torbert Development Editor: Noelle Bathurst Director of Digital Content: Doug Ruby Digital Development Editor: Meg B. Maloney Digital Development Editor: Kevin Shanahan Executive Marketing Manager: Melissa S. Caughlin Content Project Manager: Bruce Gin Senior Buyer: Michael R. McCormick Design: Debra Kubiak Cover Image: Aleksandar Velasevic/Getty Images Typeface: 10/12 Times Roman Compositor: Laserwords Private Limited Printer: R. R. Donnelley 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 Bodie, Zvi. Investments / Zvi Bodie, Boston University, Alex Kane, University of California, San Diego, Alan J. Marcus, Boston College.—10th Edition. pages cm.—(The McGraw-Hill/Irwin series in finance, insurance and real estate) Includes index. ISBN-13: 978-0-07-786167-4 (alk. paper) ISBN-10: 0-07-786167-1 (alk. paper) 1. Investments. 2. Portfolio management. I. Kane, Alex. II. Marcus, Alan J. III. Title. HG4521.B564 2014 332.6—dc23 2013016066 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. www.mhhe.com bboodd6611667711__ffmm__ii--xxxxvviiiiii..iinndddd iivv 77//3311//1133 77::2222 PPMM 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 Alan Marcus is the Mario J. and Adele Barron Professor Alex Kane is professor of Gabelli Professor of Finance of Management at Boston finance and economics at in the Carroll School of University. He holds a PhD the Graduate School of Management at Boston from the Massachusetts International Relations College. He received his PhD Institute of Technology and and Pacific Studies at the in economics from MIT. has served on the finance fac- University of California, Professor Marcus has been ulty at the Harvard Business San Diego. He has been visit- a visiting professor at the School and MIT’s Sloan ing professor at the Faculty Athens Laboratory of School of Management. of Economics, University of Business Administration and Professor Bodie has published Tokyo; Graduate School of at MIT’s Sloan School of widely on pension finance Business, Harvard; Kennedy Management and has served and investment strategy in School of Government, as a research associate at the leading professional jour- Harvard; and research associ- National Bureau of Economic nals. In cooperation with the ate, National Bureau of Research. Professor Marcus Research Foundation of the Economic Research. An has published widely in the CFA Institute, he has recently author of many articles in fields of capital markets and produced a series of Webcasts finance and management portfolio management. His and a monograph entitled The journals, Professor Kane’s consulting work has ranged Future of Life Cycle Saving research is mainly in corporate from new-product develop- and Investing. finance, portfolio management, ment to provision of expert and capital markets, most testimony in utility rate recently in the measurement proceedings. He also spent of market volatility and 2 years at the Federal Home pricing of options. Loan Mortgage Corporation (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 bboodd6611667711__ffmm__ii--xxxxvviiiiii..iinndddd vv 77//3311//1133 77::2222 PPMM Final PDF to printer Brief Contents Preface xvi PART III PART I Equilibrium in Capital Introduction 1 Markets 291 1 9 The Investment Environment 1 The Capital Asset Pricing Model 291 2 10 Asset Classes and Financial Arbitrage Pricing Theory and Multifactor Instruments 28 Models of Risk and Return 324 3 11 How Securities Are Traded 59 The Efficient Market Hypothesis 349 4 12 Mutual Funds and Other Investment Behavioral Finance and Technical Companies 92 Analysis 388 13 PART II Empirical Evidence on Security Returns 414 Portfolio Theory and Practice 117 PART IV 5 Fixed-Income Risk, Return, and the Historical Securities 445 Record 117 6 14 Capital Allocation to Risky Assets 168 Bond Prices and Yields 445 7 15 Optimal Risky Portfolios 205 The Term Structure of Interest Rates 487 8 16 Index Models 256 Managing Bond Portfolios 515 vi bboodd6611667711__ffmm__ii--xxxxvviiiiii..iinndddd vvii 77//3311//1133 77::2222 PPMM Final PDF to printer Brief Contents PART V PART VII Security Analysis 557 Applied Portfolio 17 Management 835 Macroeconomic and Industry Analysis 557 24 18 Portfolio Performance Evaluation 835 Equity Valuation Models 591 25 19 International Diversification 882 Financial Statement Analysis 635 26 Hedge Funds 926 PART VI 27 Options, Futures, and The Theory of Active Portfolio Other Derivatives 678 Management 951 28 20 Investment Policy and the Framework of the Options Markets: Introduction 678 CFA Institute 977 21 Option Valuation 722 REFERENCES TO CFA PROBLEMS 1015 22 GLOSSARY G-1 Futures Markets 770 23 NAME INDEX I-1 Futures, Swaps, and Risk Management 799 SUBJECT INDEX I-4 vii bboodd6611667711__ffmm__ii--xxxxvviiiiii..iinndddd vviiii 77//3311//1133 77::2222 PPMM Final PDF to printer Contents Preface xvi Reverses / Federal Funds / Brokers’ Calls / The LIBOR Market / Yields on Money Market Instruments PART I 2.2 The Bond Market 34 Introduction 1 Treasury Notes and Bonds / Inflation-Protected Treasury Bonds / Federal Agency Debt / International Bonds / Municipal Bonds / Corporate Bonds / Mortgages and CHAPTER 1 Mortgage-Backed Securities The Investment Environment 1 2.3 Equity Securities 41 Common Stock as Ownership Shares / Characteristics of 1.1 Real Assets versus Financial Assets 2 Common Stock / Stock Market Listings / Preferred Stock / 1.2 Financial Assets 3 Depository Receipts 1.3 Financial Markets and the Economy 5 2.4 Stock and Bond Market Indexes 44 The Informational Role of Financial Markets / Stock Market Indexes / Dow Jones Averages / Standard Consumption Timing / Allocation of Risk / Separation of & Poor’s Indexes / Other U.S. Market-Value Indexes / Ownership and Management / Corporate Governance Equally Weighted Indexes / Foreign and International and Corporate Ethics Stock Market Indexes / Bond Market Indicators 1.4 The Investment Process 8 2.5 Derivative Markets 51 1.5 Markets Are Competitive 9 Options / Futures Contracts The Risk–Return Trade-Off / Efficient Markets End of Chapter Material 54–58 1.6 The Players 11 Financial Intermediaries / Investment Bankers / Venture CHAPTER 3 Capital and Private Equity How Securities Are Traded 59 1.7 The Financial Crisis of 2008 15 Antecedents of the Crisis / Changes in Housing Finance / 3.1 How Firms Issue Securities 59 Mortgage Derivatives / Credit Default Swaps / The Rise Privately Held Firms / Publicly Traded Companies / Shelf of Systemic Risk / The Shoe Drops / The Dodd-Frank Registration / Initial Public Offerings Reform Act 3.2 How Securities Are Traded 63 1.8 Outline of the Text 23 Types of Markets End of Chapter Material 24–27 Direct Search Markets / Brokered Markets / Dealer Markets / Auction Markets CHAPTER 2 Types of Orders Asset Classes and Financial Instruments 28 Market Orders / Price-Contingent Orders 2.1 The Money Market 29 Trading Mechanisms Treasury Bills / Certificates of Deposit / Commercial Dealer Markets / Electronic Communication Networks Paper / Bankers’ Acceptances / Eurodollars / Repos and (ECNs) / Specialist Markets viii bboodd6611667711__ffmm__ii--xxxxvviiiiii..iinndddd vviiiiii 77//3311//1133 77::2222 PPMM Final PDF to printer Contents 3.3 The Rise of Electronic Trading 68 5.1 Determinants of the Level of Interest Rates 118 3.4 U.S. Markets 69 Real and Nominal Rates of Interest / The Equilibrium NASDAQ / The New York Stock Exchange / ECNs Real Rate of Interest / The Equilibrium Nominal Rate of Interest / Taxes and the Real Rate of Interest 3.5 New Trading Strategies 71 5.2 Comparing Rates of Return for Different Holding Algorithmic Trading / High-Frequency Trading / Dark Periods 122 Pools / Bond Trading Annual Percentage Rates / Continuous Compounding 3.6 Globalization of Stock Markets 74 5.3 Bills and Inflation, 1926–2012 125 3.7 Trading Costs 76 5.4 Risk and Risk Premiums 127 3.8 Buying on Margin 76 Holding-Period Returns / Expected Return and Standard 3.9 Short Sales 80 Deviation / Excess Returns and Risk Premiums 3.10 Regulation of Securities Markets 83 5.5 Time Series Analysis of Past Rates of Return 130 Self-Regulation / The Sarbanes-Oxley Act / Insider Trading Time Series versus Scenario Analysis / Expected Returns End of Chapter Material 87–91 and the Arithmetic Average / The Geometric (Time- Weighted) Average Return / Variance and Standard CHAPTER 4 Deviation / Mean and Standard Deviation Estimates Mutual Funds and Other Investment from Higher-Frequency Observations / The Reward-to- Companies 92 Volatility (Sharpe) Ratio 5.6 The Normal Distribution 135 4.1 Investment Companies 92 5.7 Deviations from Normality and Risk Measures 137 4.2 Types of Investment Companies 93 Value at Risk / Expected Shortfall / Lower Partial Unit Investment Trusts / Managed Investment Companies / Standard Deviation and the Sortino Ratio / Relative Other Investment Organizations Frequency of Large, Negative 3-Sigma Returns Commingled Funds / Real Estate Investment Trusts 5.8 Historic Returns on Risky Portfolios 141 (REITs) / Hedge Funds Portfolio Returns / A Global View of the Historical 4.3 Mutual Funds 96 Record Investment Policies 5.9 Long-Term Investments 152 Money Market Funds / Equity Funds / Sector Funds / Normal and Lognormal Returns / Simulation of Long- Bond Funds / International Funds / Balanced Funds / Term Future Rates of Return / The Risk-Free Rate Asset Allocation and Flexible Funds / Index Funds Revisited / Where Is Research on Rates of Return How Funds Are Sold Headed? / Forecasts for the Long Haul 4.4 Costs of Investing in Mutual Funds 99 End of Chapter Material 161–167 Fee Structure Operating Expenses / Front-End Load / Back-End CHAPTER 6 Load / 12b-1 Charges Capital Allocation to Risky Assets 168 Fees and Mutual Fund Returns 4.5 Taxation of Mutual Fund Income 103 6.1 Risk and Risk Aversion 168 4.6 Exchange-Traded Funds 103 Risk, Speculation, and Gambling / Risk Aversion and Utility Values / Estimating Risk Aversion 4.7 Mutual Fund Investment Performance: A First Look 107 6.2 Capital Allocation across Risky and Risk-Free 4.8 Information on Mutual Funds 110 Portfolios 175 End of Chapter Material 112–116 6.3 The Risk-Free Asset 177 6.4 Portfolios of One Risky Asset and a Risk-Free PART II Asset 178 Portfolio Theory 6.5 Risk Tolerance and Asset Allocation 182 Nonnormal Returns and Practice 117 6.6 Passive Strategies: The Capital Market Line 187 End of Chapter Material 190–199 CHAPTER 5 Appendix A: Risk Aversion, Expected Utility, and the Risk, Return, and the Historical Record 117 St. Petersburg Paradox 199 ix bboodd6611667711__ffmm__ii--xxxxvviiiiii..iinndddd iixx 77//3311//1133 77::2222 PPMM