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E-book

Investments: Principles of Portfolio and Equity Analysis

ISBN: 978-1-118-00116-5
720 pages
January 2011
Investments: Principles of Portfolio and Equity Analysis (1118001168) cover image
A comprehensive guide to investment analysis and portfolio management by an expert team from the CFA Institute

In a world of specialization, no other profession likely requires such broad, yet in-depth knowledge than that of financial analyst. Financial analysts must not only possess a broad understanding of the financial markets-including structure, organization, efficiency, portfolio management, risk and return, and planning and construction-but they must also have a strong sense of how to evaluate industries and companies prior to engaging in an analysis of a specific stock. Investments: Principles of Portfolio and Equity Analysis provides the broad-based knowledge professionals and students of the markets need to manage money and maximize return. The book

  • Details market structure and functions, market anomalies, secondary market basics, and regulation
  • Describes investment assets and asset classes, types of positions and orders, as well as forecasting methodologies
  • Discusses return and risk characteristics, portfolio diversification and management, the basics of both technical analysis and major technical indicators, and much more
  • A companion Workbook, which includes learning outcomes, summary overviews, and problems and solutions sections is available and sold separately

Investments provides readers unparalleled access to the best in professional quality information on investment analysis and portfolio management.

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Foreword xiii

Acknowledgments xv

Introduction xvii

CHAPTER 1 Market Organization and Structure 1

Learning Outcomes 1

1. Introduction 1

2. The Functions of the Financial System 2

3. Assets and Contracts 10

4. Financial Intermediaries 24

5. Positions 35

6. Orders 41

7. Primary Security Markets 47

8. Secondary Security Market and Contract Market Structures 51

9. Well-Functioning Financial Systems 56

10. Market Regulation 58

11. Summary 61

CHAPTER 2 Security Market Indices 73

Learning Outcomes 73

1. Introduction 73

2. Index Definition and Calculations of Value and Returns 75

3. Index Construction and Management 78

4. Uses of Market Indices 90

5. Equity Indices 91

6. Fixed-Income Indices 94

7. Indices for Alternative Investments 96

8. Summary 101

CHAPTER 3 Market Efficiency 109

Learning Outcomes 109

1. Introduction 109

2. The Concept of Market Efficiency 111

3. Forms of Market Efficiency 118

4. Market Pricing Anomalies 124

5. Behavioral Finance 131

6. Summary 134

CHAPTER 4 Portfolio Management: An Overview 139

Learning Outcomes 139

1. Introduction 139

2. A Portfolio Perspective on Investing 140

3. Investment Clients 149

4. Steps in the Portfolio Management Process 156

5. Pooled Investments 160

6. Summary 172

CHAPTER 5 Portfolio Risk and Return: Part I 175

Learning Outcomes 175

1. Introduction 175

2. Investment Characteristics of Assets 176

3. Risk Aversion and Portfolio Selection 200

4. Portfolio Risk 209

5. Efficient Frontier and Investor’s Optimal Portfolio 222

6. Summary 234

CHAPTER 6 Portfolio Risk and Return: Part II 243

Learning Outcomes 243

1. Introduction 243

2. Capital Market Theory 244

3. Pricing of Risk and Computation of Expected Return 256

4. The Capital Asset Pricing Model 267

5. Beyond the Capital Asset Pricing Model 284

6. Summary 287

CHAPTER 7 Basics of Portfolio Planning and Construction 295

Learning Outcomes 295

1. Introduction 295

2. Portfolio Planning 296

3. Portfolio Construction 312

4. Summary 326

CHAPTER 8 Overview of Equity Securities 331

Learning Outcomes 331

1. Introduction 331

2. Equity Securities in Global Financial Markets 332

3. Types and Characteristics of Equity Securities 338

4. Private versus Public Equity Securities 345

5. Investing in Nondomestic Equity Securities 347

6. Risk and Return Characteristics of Equity Securities 353

7. Equity Securities and Company Value 356

8. Summary 362

CHAPTER 9 Introduction to Industry and Company Analysis 369

Learning Outcomes 369

1. Introduction 370

2. Uses of Industry Analysis 370

3. Approaches to Identifying Similar Companies 371

4. Industry Classification Systems 374

5. Describing and Analyzing an Industry 385

6. Company Analysis 412

7. Summary 417

CHAPTER 10 Equity Valuation: Concepts and Basic Tools 425

Learning Outcomes 425

1. Introduction 426

2. Estimated Value and Market Price 426

3. Major Categories of Equity Valuation Models 428

4. Present Value Models: The Dividend Discount Model 430

5. Multiplier Models 445

6. Asset-Based Valuation 457

7. Summary 461

CHAPTER 11 Equity Market Valuation 469

Learning Outcomes 469

1. Introduction 469

2. Estimating a Justified P/E Ratio 470

3. Top-Down and Bottom-Up Forecasting 484

4. Relative Value Models 491

5. Summary 506

CHAPTER 12 Technical Analysis 515

Learning Outcomes 515

1. Introduction 515

2. Technical Analysis: Definition and Scope 516

3. Technical Analysis Tools 520

4. Elliott Wave Theory 563

5. Intermarket Analysis 566

6. Summary 568

Problems 570

Glossary 575

References 589

About the Authors 595

About the CFA Program 601

Index 603

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MICHAEL G. MCMILLAN, CFA is Director, Ethics and Professional Standards in the Education Division of CFA Institute. Dr. McMillan joined CFA Institute in 2008 after more than a decade as a professor of accounting and finance at Johns Hopkins University's Carey Business School and The George Washington University's School of Business. He has a doctorate in accounting and finance from The George Washington University, an MBA from Stanford University, and a BA from the University of Pennsylvania. Dr. McMillan is a member of the CFA Society of Washington, DC and the East African Society of Investment Professionals.

JERALD E. PINTO, CFA is Director, Curriculum Projects, in the Education Division of CFA Institute. Before coming to CFA Institute in 2002, he consulted to corporations, foundations, and partnerships in investment planning, portfolio analysis, and quantitative analysis. He has also worked in the investment and banking industries in New York City and taught finance at New York University's Stern School of Business. He holds an MBA from Baruch College, a PhD in finance from the Stern School, and earned his CFA charter in 1992.

WENDY L. PIRIE, CFA is Director, Curriculum Projects, in the Education Division of CFA Institute. Prior to joining CFA Institute in 2008, she taught finance, accounting, statistics, taxation, business law, and marketing for over twenty years at both large and small, public and private universities, religious colleges, and military academies. Her work has been published in Journal of Financial Research and Journal of Economics and Finance. She holds a PhD from Queen's University in Kingston, Ontario and MBAs fromthe Universities of Toronto and Calgary.

GERHARD VAN DE VENTER, CFA is Deputy Head of the School of Finance and Economics at University of Technology, Sydney. He was previously director, Curriculum Projects, in the Education Division of CFA Institute. He began his career in South Africa as a financial analyst and later as a dealer at the Bond Exchange, where he traded fixed income securities. He holds a PhD in finance from the University of Technology, Sydney. He is a member of CFA Institute and the New York Society of Security Analysts.

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