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Quantitative Investment Analysis (CFA Institute Investment Series) PDF

597 Pages·2007·3.73 MB·English
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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. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our Web site at www.wiley.com. 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

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