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Institutional Investment Management: Equity and Bond Portfolio Strategies and Applications

ISBN: 978-0-470-40094-4
856 pages
October 2009
Institutional Investment Management: Equity and Bond Portfolio Strategies and Applications (0470400943) cover image

The most comprehensive coverage of institutional investment management issues

This comprehensive handbook of investment management theories, concepts, and applications opens with an overview of the financial markets and investments, as well as a look at institutional investors and their objectives. From here, respected investment expert Frank Fabozzi moves on to cover a wide array of issues in this evolving field. From valuation and fixed income analysis to alternative investments and asset allocation, Fabozzi provides the best in cutting-edge information for new and seasoned practitioners, as well as professors and students of finance.

  • Contains practical, real-world applications of investment management theories and concepts
  • Uses unique illustrations of factor models to highlight how to build a portfolio
  • Includes insights on execution and measurement of transaction costs
  • Covers fixed income (particularly structured products) and derivatives

Institutional Investment Management is an essential read for anyone who needs to hone their skills in this discipline.

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Preface.

Acknowledgments.

About the Author.

CHAPTER 1 Overview of Investment Management.

Setting Investment Objectives.

Establishing an Investment Policy.

Selecting a Portfolio Strategy.

Constructing and Monitoring the Portfolio.

Measuring and Evaluating Performance.

References.

PART ONE Portfolio Theory and Asset Pricing.

CHAPTER 2 Theory of Portfolio Selection.

Some Basic Concepts.

Measuring a Portfolio’s Expected Return.

Measuring Portfolio Risk.

Portfolio Diversification.

Choosing a Portfolio of Risky Assets.

Index Model’s Approximations to the Covariance Structure.

Summary.

References.

CHAPTER 3 Applying Mean-Variance Analysis.

Using Historical Data to Estimate Inputs.

Application of Portfolio Theory to Asset Allocation.

Implementing the Optimal Portfolio.

Summary.

References.

CHAPTER 4 Issues in the Theory of Portfolio Selection.

Quick Review of Probability Theory.

Limitations of the Variance as a Risk Measure.

Desirable Features of Investment Risk Measures.

Alternative Risk Measures for Portfolio Selection.

Extensions of the Theory of Portfolio Selection.

Behavioral Finance Attack on the Theory of Portfolio.

Summary.

References.

CHAPTER 5 Asset Pricing Theories.

Characteristics of an Asset Pricing Model.

Capital Asset Pricing Model.

Arbitrage Pricing Theory Model.

Some Principles to Take Away.

Summary.

Appendix.

References.

PART TWO Common Stock Analysis and Portfolio Management.

CHAPTER 6 The U.S. Equity Markets.

Exchange Market Structures.

The U.S. Stock Markets: Exchanges and OTC Markets.

Off-Exchange Markets and Alternative Electronic Markets.

Evolving Stock Market Practices.

Basic Functioning of Stock Markets.

Summary.

References.

CHAPTER 7 Common Stock Strategies and Performance Evaluation.

Market Efficiency.

Stock Market Indicators.

Top-Down vs. Bottom-Up Approaches.

Fundamental vs. Technical Analysis.

Strategies Based on Technical Analysis.

Strategies Based on Fundamental Analysis.

Equity Style Investing.

Passive Strategies.

Measuring and Evaluating Performance.

Summary.

References.

CHAPTER 8 Financial Analysis.

Financial Ratio Analysis.

Cash Flow Analysis.

Usefulness of Cash Flows in Financial Analysis.

Summary.

References.

CHAPTER 9 Applied Equity Valuation.

Discounted Cash Flow Models.

Relative Valuation Methods.

DCF vs. RV Methods.

Summary.

References.

CHAPTER 10 Forecasting Stock Returns.

The Concept of Predictability.

A Closer Look at Pricing Models.

Predictive Return Models.

Is Forecasting Markets Worth the Effort?

Summary.

References.

CHAPTER 11 Managing a Common Stock Portfolio with Fundamental Factor Models.

Tracking Error.

Fundamental Factor Model Description and Estimation.

Risk Decomposition.

Applications in Portfolio Construction and Risk Control.

Summary.

References.

CHAPTER 12 Transaction Costs and Trade Execution in Common Stock Portfolio Management.

Trading Mechanics.

Trading Arrangements for Institutional Investors.

A Taxonomy of Transaction Costs.

Liquidity and Transaction Costs.

Market Impact Measurements and Empirical Findings.

Forecasting and Modeling Market Impact.

Incorporating Transaction Costs in Asset-Allocation Models.

Optimal Trading.

Integrated Portfolio Management Beyond Expected Return and Portfolio Risk.

Summary.

References.

CHAPTER 13 Using Stock Index Futures and Equity Swaps in Equity Portfolio Management.

Derivatives Process.

Basic Features of Futures Contracts.

Basic Features of Stock Index Futures.

Applications for Stock Index Futures.

Equity Swaps.

Summary.

References.

CHAPTER 14 Using Equity Options in Investment Management.

Basic Features of Options.

Basic Features of Listed Equity Options.

Risk and Return Characteristics of Listed Options.

The Option Price.

Use of Listed Equity Options in Portfolio Management.

OTC Equity Options: The Basics.

Use of Exotic Equity Options.

Summary.

References.

CHAPTER 15 Equity Option Pricing Models.

Put-Call Parity Relationship.

Option Pricing Models.

Sensitivity of the Option Price to a Change in Factors.

Estimating Expected Stock Return Volatility.

Summary.

References

PART THREE Bond Analysis and Portfolio Management.

CHAPTER 16 Bond Fundamentals and Risks.

Features of Bonds.

Risks Associated with Investing in Bonds.

Summary.

Appendix: Calculating Accrued Interest.

References.

CHAPTER 17 Treasury and Agency Securities, Corporate Bonds, and Municipal Bonds.

Treasury Securities.

Federal Agency Securities.

Corporate Bonds.

Municipal Bonds.

Non-U.S. Bonds.

Summary.

References.

CHAPTER 18 Structured Products: RMBS, CMBS, and ABS.

Agency Residential Mortgage-Backed Securities.

Private-Label Residential MBS.

Mortgage-Related, Asset-Backed Securities: Subprime MBS.

Commercial Mortgage-Backed Securities.

Nonmortgage Asset-Backed Securities.

Summary.

References.

CHAPTER 19 The Structure of Interest Rates.

The Base Interest Rate.

The Risk Premium Between Non-Treasury and Treasury Securities with the Same Maturity.

Factors Affecting the Risk Premium.

Term Structure of Interest Rates.

Summary.

References.

CHAPTER 20 Bond Pricing and Yield Measures.

Pricing of Option-Free Bonds.

Conventional Yield Measures.

Portfolio Yield Measures.

Total Return.

Summary.

CHAPTER 21 Bond Price Volatility and the Measurement of Interest Rate Risk.

Price Volatility Properties of Option-Free Bonds.

Factors that Affect a Bond’s Price Volatility.

Measuring Interest Rate Risk Using the Price Value of a Basis Point.

Measuring Interest Rate Risk Using Duration and Convexity.

Measuring Exposure to Yield Curve Changes Key Rate Duration.

Summary.

References.

CHAPTER 22 Valuing Bonds with Embedded Options.

The Interest Rate Lattice.

Calibrating the Lattice.

Using the Lattice for Valuation.

Using the Lattice Model to Value Bonds with Embedded Options.

Extensions.

Summary.

References.

CHAPTER 23 Bond Portfolio Strategies.

Bond Market Indexes.

The Spectrum of Strategies.

Value-Added Strategies.

Using Factor Models to Manage a Portfolio.

Liability-Driven Strategies.

Summary.

References.

CHAPTER 24 Using Derivatives in Bond Portfolio Management.

Using Treasury Bond and Note Futures Contracts in Bond Portfolio Management.

Use of Interest Rate Options in Bond Portfolio Management.

Using Interest Rate Swaps in Bond Portfolio Management.

Using Stock Index Futures and Treasury Bond Futures to Implement an Asset Allocation Decision.

Using Credit Default Swaps to Manage Credit Risk.

Summary.

References.

PART FOUR Investment Companies, Exchange-Traded Funds, and Alternative Investments.

CHAPTER 25 Investment Companies, Exchange-Traded Funds, and Investment-Oriented Life Insurance.

Investment Companies.

Exchange-Traded Funds.

Investment-Oriented Life Insurance.

Summary.

References.

CHAPTER 26 Alternative Assets.

Hedge Funds.

Private Equity.

Commodity Investments.

Summary.

References.

APPENDIX.

Measuring and Forecasting Yield Volatility.

Calculating the Standard Deviation from Historical Data.

Modeling and Forecasting Yield Volatility.

Summary.

References.

Index.

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