Quantitative Investment Analysis (CFA Institute Investment Series)

597 Pages·2007·3.73 MB·English

by  Richard A., CFA DeFusco, Dennis W., CFA McLeavey, Jerald E., CFA Pinto, David E., CFA Runkle

QUANTITATIVE
INVESTMENT
ANALYSIS
Second Edition
Richard A. DeFusco, CFA
Dennis W. McLeavey, CFA
Jerald E. Pinto, CFA
David E. Runkle, CFA
John Wiley & Sons, Inc.
QUANTITATIVE
INVESTMENT
ANALYSIS
CFA Institute is the premier association for investment professionals around the world,
with over 85,000 members in 129 countries. Since 1963 the organization has developed
and administered the renowned Chartered Financial Analyst Program. With a rich history
of leading the investment profession, CFA Institute has set the highest standards in ethics,
education, and professional excellence within the global investment community, and is the
foremost authority on investment profession conduct and practice.
Each book in the CFA Institute Investment Series is geared toward industry practitioners
along with graduate-level finance students and covers the most important topics in the
industry. The authors of these cutting-edge books are themselves industry professionals and
academics and bring their wealth of knowledge and expertise to this series.
QUANTITATIVE
INVESTMENT
ANALYSIS
Second Edition
Richard A. DeFusco, CFA
Dennis W. McLeavey, CFA
Jerald E. Pinto, CFA
David E. Runkle, CFA
John Wiley & Sons, Inc.
Copyright ⃝c 2004, 2007 by CFA Institute. All rights reserved.
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Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Quantitative investment analysis / Richard A. DeFusco . . . [et al.].—
2nd ed.
p. cm.—(The CFA Institute investment series)
Includes bibliographical references.
ISBN-13 978-0-470-05220-4 (cloth)
ISBN-10 0-470-05220-1 (cloth)
1. Investment analysis—Mathematicalmodels. I.DeFusco,Richard
Armand.
HG4529.Q35 2006
332.601’5195—dc22
2006052578
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
To Margo, Rachel, and Rebekah
R.A.D.
To Jan, Christine, and Andy
D.W.M.
In memory of Irwin T. Vanderhoof, CFA
J.E.P.
To Patricia, Anne, and Sarah
D.E.R.
CONTENTS
Foreword xiii
Acknowledgments xvii
Introduction xix
CHAPTER 1
The Time Value of Money 1
1 Introduction 1
2 Interest Rates: Interpretation 1
3 The Future Value of a Single Cash Flow 3
3.1 The Frequency of Compounding 8
3.2 Continuous Compounding 10
3.3 Stated and Effective Rates 12
4 The Future Value of a Series of Cash Flows 13
4.1 Equal Cash Flows—Ordinary Annuity 13
4.2 Unequal Cash Flows 15
5 The Present Value of a Single Cash Flow 15
5.1 Finding the Present Value of a Single Cash Flow 15
5.2 The Frequency of Compounding 17
6 The Present Value of a Series of Cash Flows 19
6.1 The Present Value of a Series of Equal Cash Flows 19
6.2 The Present Value of an Infinite Series of Equal Cash Flows—Perpetuity 23
6.3 Present Values Indexed at Times Other Than t = 0 24
6.4 The Present Value of a Series of Unequal Cash Flows 26
7 Solving for Rates, Number of Periods, or Size of Annuity Payments 27
7.1 Solving for Interest Rates and Growth Rates 27
7.2 Solving for the Number of Periods 30
7.3 Solving for the Size of Annuity Payments 30
7.4 Review of Present and Future Value Equivalence 35
7.5 The Cash Flow Additivity Principle 36
vii