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Investments: Analysis and Management, 2nd Canadian Edition

Investments: Analysis and Management, 2nd Canadian Edition

W. Sean Cleary, Charles P. Jones

ISBN: 978-0-470-83542-5

Oct 2004

Select type: Hardcover

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Description

The First Edition of Investments by Cleary and Jones was highly regarded as being student-friendly, accessible, and focused on the real-world of investments. The Second Edition continues this by adding more real-world material, strengthening its focus on the CFA, expanding the complexity of the problem material, and incorporating a new design. Investments by Cleary & Jones provides a balanced approach to the discipline – it provides all of the necessary theoretical coverage to complete the course while providing students with a strong sense of what actually happens "on the street." Students do not get lost in unnecessary and long theoretical discussions, and are easily able to see how concepts are used in the investments world.

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PART ONE: BACKGROUND

CHAPTER 1 : UNDERSTANDING INVESTMENTS
The Purpose of this Textbook
The Nature of Investments
  Some Definitions
  Investing as a Part of Personal Financial Planning
  Why Do We Invest? 
The Importance of Studying Investments   

Understanding the Investment Decision Process  
  The Basis of Investment Decisions
  The Expected Risk-Return Trade-Off
  Structuring the Decision Process 
Important Considerations in the Investment Decision Process      
  The Great Unknown
  The Global Investments Arena
  The New Economy versus The Old Economy
  The Rise of the Internet
  Institutional Investors
  The Issue of Market Efficiency
  Corporate Governance
Appendix 1-A: Professional Educational Alternatives
Appendix 1-B: The Canadian Securities Course (CSC)
Appendix 1-C: The Chartered Financial Analyst Program

CHAPTER 2: INVESTMENT ALTERNATIVES
Organizing Financial Assets  
  An International Perspective
Non-Marketable Financial Assets
Money Market Securites
Capital Market Securites  
  Fixed-Income Securities
  Asset-Backed Securities
  Equity Securities
Derivative Securites
  Options
  Futures Contracts
Appendix 2-A: Taxation of Investment Income in Canada

CHAPTER 3: INVESTMENT FUNDS
Investing Indirectly
Investing Indirectly through Investment Funds
What Is an Investment Fund?
Types of Investment Funds   Unit Investment Trust
  Closed-End Investment Funds
  Open-End Investment Funds (Mutual Funds) 
Major Types of Mutual Funds
  Money Market Funds
  Equity and Bond & Income Funds
Indirect Investment Transactions  
  Closed-End Funds
  Mutual Funds
  Exchange-Traded Funds (ETFs)
  Distinguishing among ETFs, Closed-End Funds, and Mutual Funds
  Segregated Funds
  Labour Sponsored Venture Capital Corporations (LSVCCs)
Investment Funds and Performance  
  Benchmarks
  How Important Are Expenses?
  Mutual Fund Ratings
  Consistency of Performance
Investing Internationally through Investment Funds  
  New Developments in International Investing
The Future of Indirect Investing

CHAPTER 4 : SECURITIES MARKETS
The Importance of Financial Markets
The Primary Markets  
  Investment Dealers
  The Underwriting Process
  The Prompt Offering Qualification (POP) System
  The Listing Process
  Global Security Issues
  Private Placements
The Secondary Markets  
  Equity Securities - Auction Markets
  Equity Securities - Negotiated Markets
  The Third and Fourth Markets
  After-Hours Trading
  In-House Trading
  Comparison of International Equity Markets
  Stock Market Indicators
  Bond Markets
  Derivatives Markets
The Changing Securites  
  The Globalization of Securities Markets
Appendix 4-A: Stock Market Indexes

CHAPTER 5 : HOW SECURITIES ARE TRADED
Brokerage Transactions  
  Brokerage Firms
  Stockbrokers or Financial Consultants?
  Types of Brokerage Accounts
  Commissions
  Electronic Trading and the Internet
  Investing without a Broker
How Orders Work  
  Orders on the Organized Exchanges
  Orders in the Over-the-Counter Market
  Types of Orders
  Clearing Procedures
Investor Protection in the Securities Markets  
  The Canadian Regulatory Environment
  Margin
  Short Sales
Appendix 5-A: Trading on the NYSE
Appendix 5-B: Securites Regulation in the United States

CHAPTER 6 : THE RETURNS AND RISKS FROM INVESTING
Return
  The Components of Return
Risk
  Sources of Risk
  Types of Risk
Measuring Returns
  Total Return
  Return Relative
  Cumulative Wealth Index
  International Returns
  Summary Statistics for Returns 
Measuring Risk
  Standard Deviation
  Risk Premiums
Realized Returns and Risks from Investing
  Total Returns and Standard Deviations
  Cumulative Wealth Indexes

PART TWO : IMPORTANT INVESTMENT CONCEPTS


CHAPTER 7 : EXPECTED RETURN AND RISK
Future Return and Risk
Estimating Security Return and Risk
  Dealing with Uncertainty
  Calculating Expected Return
  Calculating Risk
Portfolio Return and Risk
  Portfolio Expected Return
  Portfolio Risk
Analyzing Portfolio Risk
  Risk Reduction in Stock Portfolios
  Diversification
Markowitz Diversification
  Measuring Co-Movements in Security Returns
  The Correlation Coefficient
  Covariance
Calculating the Portfolio Risk
  The Two-Security Case
  The n-Security Case
Simplifying the Markowitz Calculations
  The Single-Index Model

CHAPTER 8 : PORTFOLIO SELECTION
Introducing Riskless Assets
Building a Portfolio
Step 1: Use the Markowitz Portfolio Selection Model
  Efficient Portfolios
  Selecting an Optimal Portfolio of Risky Assets
  Alternative Methods of Obtaining the Efficient Frontier
  Selecting Optimal Asset Classes
Step 2: Consider Borrowing and Lending Possibilities
  Risk-Free Borrowing and Lending
  The New Efficient Set
Step 3: Choose the Final Portfolio Based on Preferences
  The Separation Theorem
  The Implications of Portfolio Selection
  Systematic and Non-Systematic Risk
Appendix 8-A: Modern Portfolio Theory and the Portfolio Management Process

CHAPTER 9 : CAPITAL MARKET THEORY
Introduction to Capital Market Theory
  The Assumptions of the CAPM
  Equilibrium in the Capital Markets
The Market Portfolio
  The Importance of the Market Portfolio
  Composition of the Market Portfolio
The Equilibrium Risk – Return Trade-Off
  The Capital Market Line
  The Security Market Line
Estimating the SML
  Estimating Beta
Tests of the CAPM
  The Fama and French Studies
  Difficulties in Testing the CAPM
Arbitrage Pricing Theory
  Understanding the APT Model
  Using APT in Investment Decisions
Some Conclusions about Asset Pricing

CHAPTER 10 : MARKET EFFICIENCY
The Concept of an Efficient Market
What is an Efficient Market?
  Why the Market Can Be Expected to Be Efficient
  Forms of Market Efficiency
Evidence on Market Efficiency
  Weak-Form Evidence
  Semi-Strong-Form Evidence
  Strong-Form Evidence
Implications of the Efficient Market Hypothesis
  For Technical Analysis
  For Fundamental Analysis
  For Money Management
Evidence of Market Anomalies  
  Momentum in Stock Returns
  Earnings Announcements
  Value Stocks
  The Size Effect
  Seasonality in Stock Returns
  The Value Line Ranking System
  Other Anomalies
Some Conclusions about Market Efficiency


PART THREE: FIXED-INCOME SECURITIES: ANALYSIS, VALUATION, AND MANAGEMENT

CHAPTER 11 : BOND YIELDS AND PRICES
Bond Prices  
  The Valuation Principle
  Bond Valuation
Bond Yields  
  The Basic Components of Interest Rates
  Measuring Bond Yields
Bond Price Changes  
  Bond Price Changes Over Time
  Bond Price Changes as a Result of Interest Rate Changes
  Measuring Bond Price Volatility: Duration
Appendix 11-A: Treasury Bill Yields and Prices
Appendix 11-B: Effective Duration and Effective Convexity
Appendix 11-C: Convertible Bonds

CHAPTER 12 : BONDS: ANALYSIS AND STRATEGY
Why Buy Bonds?  
  Buying Foreign Bonds
Important Considerations in Managing a Bond Portfolio    
   Understanding the Bond Market
  The Term Structure of Interest Rates
  The Risk Structure of Interest Rates – Yield Spread
Bond Strategies  
  Passive Management Strategies
  Active Management Strategies
  Immunization – A Hybrid Strategy
Building a Fixed-Income Portfolio  
  Conservative Investors
  Aggressive Investors
  The International Perspective

PART FOUR: COMMON STOCKS: ANALYSIS, VALUATION, AND MANAGEMENT


CHAPTER 13 : COMMON STOCK VALUATION
The Present Value Approach  
  The Required Rate of Return
  The Expected Cash Flows
  The Dividend Discount Model
  The Multiple-Growth Case
  Dividends, Dividends – What about Capital Gains?
  Intrinsic Value
  The Dividend Discount Model in Practice
Relative Valuation Approaches  
  The P/E Ratio Approach
  Market-to-Book Ratio (M/B)
  Price/Sales Ratio (P/S)
  Other Relative Valuation Approaches
Other Valuation Issues  
  Economic Value Added
  Market Value Added
Which Valuation Method to Use?  
  Bursting the Bubble of New Economy Stocks – A Lesson in Valuation
  Some Final Thoughts on Valuation
Appendix 13-A: The Analysis and Valuation of Preferred Stock
Appendix 13-B: The Free Cash Flow Valuation Approach

CHAPTER 14 : COMMON STOCKS: ANALYSIS AND STRATEGY
Taking a Global Perspective
Some Important Issues Involving Common Stocks  
  The Impact of the Overall Market on Individual Stocks
  The Required Rate of Return
Building Stock Portfolios
The Passive Strategy  
  Buy-and-Hold Strategy
  Index Funds and Exchange-Traded Funds
The Active Strategy  
  Security Selection
  Sector Rotation
  Market Timing
  Efficient Markets and Active Strategies
Ways of Analyzing and Selecting Stocks  
  Technical Analysis
  Fundamental Analysis
  Efficient Market and Behavioural Finance
A Framework for Fundamental Analysis  
  Bottom-Up Fundamental Analysis
  Top-Down Fundamental Analysis
  The Framework for Fundamental Analysis in Perspective

PART FIVE : SECURITY ANALYSIS

CHAPTER 15 : ANALYSIS OF THE ECONOMY AND THE STOCK MARKET
The Economy and the Stock Market  
  Taking a Global Perspective
  Measures of Economic Activity
  The Business Cycle
  Other Factors Affecting the Aggregate Economy
  The Relationship between the Bond Market and the Stock Market
  Macroeconomic Forecasts of the Economy
Understanding the Stock Market  
  What Do We Mean by the Market?
  The Determinants of Stock Prices 
Valuing the Market  
  The Earnings Stream
  The Multiplier
  Putting the Two Together
Forecasting Changes in the Market  
  Using the Business Cycle to Make Market Forecasts
  Using Key Variables to Make Market Forecasts
  Using Valuation Models to Make Market Forecasts

CHAPTER 16 : INDUSTRY ANALYSIS
The Importance of Industry Analysis  
  Performance of Industries Over Time
What Is an Industry?  
  Classifying Industries
Analyzing Industries  
  The Industry Life Cycle
  Qualitative Aspects of Industry Analysis
  Industry Rotation
Evaluating Future Industry Prospects  
  Assessing Longer-Term Prospects
  Picking Industries for Next Year
  Business Cycle Analysis

CHAPTER 17 : COMPANY ANALYSIS
Fundamental Analysis
The Accounting Aspects of Earnings  
  The Financial Statements
  The Problem with Reported Earnings
  The Global Arena – International Accounting
Analyzing a Company's Profitability  
  Analyzing Return on Equity (ROE)
  Estimating the Internal (Sustainable) Growth Rate
Earnings Estimates  
  A Forecast of EPS
  The Accuracy of Earnings Forecasts
  Earnings Surprises
  The Earnings Game
  Useful Information for Investors about Earnings Estimates
  Sales Growth – An Alternative to Earnings
The P/E Ratio  
  Determinants of the P/E Ratio
  Why P/E Ratios Vary among Companies
Fundamental Security Analysis in Practice
Putting All the Pieces Together
Appendix 17-A: Financial Ratio Analysis: An Overview

CHAPTER 18 : TECHNICAL ANALYSIS
Introduction
What Is Technical Analysis?  
  A Framework for Technical Analysis
Stock Price and Volume Techniques  
  The Dow Theory
  Charts of Price Patterns
  Moving Averages
  Relative Strength
  Obtaining Charts to Use in Technical Analysis
Technical Indicators  
  Breadth Indicators
  Sentiment Indicators
Testing Technical Analysis Strategies
Some Conclusions about Technical Analysis


PART SIX : DERIVATIVE SECURITIES


CHAPTER 19 : OPTIONS
Introduction
Options  
  Why Options Markets?
Understanding Options  
  Options Terminology
  How Options Work
  The Mechanics of Trading
Some Basic Options Characteristics  
  In the Money, At the Money, and Out of the Money
  Intrinsic Values
Payoffs and Profits from Basic Option Positions  
  Calls
  Puts
  Some Observations on Buying and Selling Options
Some Basic Options Strategies  
  Covered Calls
  Protective Puts
  Portfolio Insurance
Option Valuation  
  A General Framework
  Time Values
  Boundaries on Option Prices
  The Black-Scholes Model
  Put Option Valuation
  Summarizing the Factors Affecting Options Prices
  Hedge Ratios
  Using the Black-Scholes Model
An Investor's Perspective on Puts and Calls  
  What Puts and Calls Mean to Investors
  The Evolutionary Use of Options 
Other Types of Options  
  The Basics of Stock-Index Options
  Strategies with Stock-Index Options
  The Popularity of Stock-Index Options
Appendix 19-A: Spreads and Combinations
Appendix 19-B: Rights and Warrants
Appendix 19-C: Put-Call Parity: The No-Arbitrage Argument

CHAPTER 20: FUTURES
Introduction
Understanding Futures Markets  
  Why Futures Markets?
  Current Futures Markets
  International Futures Markets
  Futures Contracts
The Structure of Futures Markets  
  Futures Exchanges
  The Clearing Corporation
The Mechanics of Trading  
  Basic Procedures
  Margin
Using Futures Contracts  
  Hedgers
  How to Hedge with Futures
  Speculators
Financial Futures  
  Interest Rate Futures
  Stock-Index Futures
  Speculating with Stock-Index Futures
  Conclusion
Appendix 20-A: Futures Options
Appendix 20-B: Other Derivative Securities

PART SEVEN : INVESTMENT MANAGEMENT

CHAPTER 21 : PORTFOLIO MANAGEMENT
Portfolio Management as a Process  
  Individual Versus Institutional Investors
Formulate an Appropriate Investment Policy  
  Objectives
  Constraints and Preferences
Determine and Quantify Capital Market Expectations  
  Forming Expectations
  Rate of Return Assumptions
Constructing the Portfolio  
  Asset Allocation
  Portfolio Optimization
Monitor Market Conditions and Investor Circumstances    
  Monitoring Market Conditions
  Changes in Investor's Circumstances
Make Portfolio Adjustments as Necessary
Performance Measurement
Illustrative Examples

CHAPTER 22 : EVALUATION OF INVESTMENT PERFORMANCE
The Bottom Line
Framework for Evaluating Portfolio Performance  
  Differential Risk Levels
  Differential Time Periods
  Appropriate Benchmarks
  Constraints on Portfolio Managers
  Other Considerations
CFA Institute's Global Investment Performance Standards (GIPS®)
Return and Risk Considerations  
  Measures of Return
  Risk Measures
Risk-Adjusted Measures of Performance  
  The Sharpe Performance Measure
  The Treynor Performance Measure
  Jensen's Differential Return Measure
Problems with Portfolio Measurement
Other Issues in Performance Evaluation  
  Monitoring Performance
  Performance Attribution
  Can Performance Be Predicted?
APPENDIX: TABLES

  • Complete update of the book to reflect all of the latest changes in the financial and investments world.
  • Expanded problem material, both in quantity and degree of complexity to allow for additional opportunities to test student understanding.
  • Expanded focus on the AIMR Chartered Financial Analysts program including sample CFA exam questions and practice problems, excerpts from the CFA Magazine, and the inclusion of CFA-specific topics (Appendix 11-B: Effective Duration and Effective Convexity; and Appendix 13-B: The Free Cash Flow Valuation Approach).
  • New Chapter-Opening Vignettes highlight actual Canadian investment personalities and discuss how they apply investments concepts to their profession.
  • New Canadian videos excerpted from ROBtv’s Money Talk showcase investment professionals discussing key topics and provide instructors with the opportunity to demonstrate real-world investment activities.
  • Expanded section on Financial Analysis now includes a sample company to allow a full ratio analysis.
  • An accessible writing style and focus on how investment theory is actually applied "on the street" make it ideal for the beginning investment student.
  • Investing Tips boxes help students quickly grasp the logic behind investments concepts.
  • Real-World Returns boxes feature current and thought provoking material from the Canadian media.
  • Preparing for your Professional Exam - this unique section at the end of every chapter is a valuable resource for students who will be registering in profession education programs. This edition contains an expanded focus on helping students prepare for the CFA exam.
  • Extensive Pedagogy helps students identify and retain important points.
  • Chapter learning Objectives.
  • Full page chapter opening vignettes.
    • Chapter previews
    • End-of-chapter summaries that relate to learning objectives
    • Key terms highlighted in text, defined in margin and listed at end of chapter
    • End-of-chapter review questions, including practice and sample CFA questions