CONTENTS PREFACE9 1. INTRODUCTION TO SECURITIES 13 Investment versus Speculation 14 The Investment Process15 Investment Categories18 Summary 26 Questions 27 References 27 2. MARKETS FOR SECURITIES AND TAXES 29 Markets and Their Functions29 Institutional Investors and Changing Markets 63 Summary72 Questions and Problems72 Appendix: Types of Orders74 3. RISK AND RETURN 77 Security Returns78 Risk in a Traditional Sense82 Systematic Risk84 Unsystematic Risk86 Risk in a Contemporary Mode93 Using Beta to Estimate Return 95 Picturing Risk and Return98 Calculating Expected Return and Risk: McDonald's Corp.100 Historical Risk and Return on Asset Classes102 Summary103 Questions104 Problems 105 Cose: Nike, Inc.107 References111 4. ECONOMIC ANALYSIS 113 Analytical Framework for Common Stocks113 Economic and Industry Analysis113 Economic Forecasting and the Stock-Investment Decision115 Forecasting Techniques 116 An Illustration of An Economic Analysis 131 Summary139 Questions and Problems 139 References 141 5. INDUSTRY ANALYSIS 142 Alternative Industry Classification Schemes142 The Economy and the Industry Analysis145 Key Characteristics in an Industry Analysis 147 Industry Share Prices Relative to Industry Earnings152 Restaurant Industry Example 152 Industry Life Cycle155 External Sources of Information for Industry Analysis 163 Other Observations on Industry Analysis 165 Summary167 Questions and Problems167 Disclosure Problem169 6. COMPANY ANALYSIS: MEASURING EARNINGS 170 Introduction170 Internal Information171 International Accounting Issues 204 External Information208 Summary 215 Questions and Problems215 Disclosure Problem217 Appendix: Financial Review218 References 228 7. COMPANY ANALYSIS: FORECASTING EARNINGS 229 Introduction229 The Chemistry of Earnings230 Forecasting via the Earnings Model244 Market-Share/Profit-Margin Approach244 Independent Forecasts of Revenue and Expenses249 Earnings-Model Projection for McDonald's Corp.250 Independent Forecast of Revenue and Expenses for McDonald's Corp.253 Summary257 Questions and Problems257 8. COMPANY ANALYSIS: APPLIED VALUATION 262 Regression and Correlation Analysis in Forecasting Revenues and Expenses 262 Trend Analysis263 Decision Trees266 Problem Areas in Implementation of Newer Techniques267 Management in Company Analysis269 Determining A Price-Earnings Ratio272 Projecting Dividends 275 Applied Stock Valuation284 Summary 288 Questions and Problems 191 Case: Philip Morris Companies292 References 296 9. BOND ANALYSIS: RETURNS AND SYSTEMATIC RISK 297 The Strategic Role of Bonds297 The Markets for Debt Securities298 Government Bonds 298 Corporate Bond Market299 International Fixed-Income Investing300 Specialized Bonds302 Bond Market Performance Results306 Bond Returns and Prices 312 Preferred-Stock Valuation315 Systematic Risk in Holding Fixed-Income Securities316 The Term Structure of Interest Rates 326 Causes of Term Structure328 Summary330 Questions331 Problems 332 References 334 10. BOND ANALYSIS: UNSYSTEMATIC RISK 336 Business and Financial Risk337 Major Factors in the Bond-Rating Process 340 Earnings Power343 Default Risk and Market Yields 357 Nonrisk Factors Influencing Yields 358 Default Risk in McDonald's Long-Term Debt369 Summary 371 Questions 371 Problems 372 Disclosure374 References374 11. BOND MANAGEMENT STRATEGIES 386 Passive or Buy-and-HoId Strategy376 Bond Ladder Strategy377 Semiactive Management Strategy: Immunization 378 Maturity Matching: The Reinvestment Problem 383 Semiactive Management Strategy: Dedication388 Dedication with Zeros391 Pressures for Active Bond Management 391 Ingredients in Active Bond Management 392 Summary 405 Questions406 Problems 407 Case: Monticello Corp.411 References 414 12. OPTIONS 416 Rationale of Options and Futures Development 416 Put and Call Options 417 Determinants of Option Value422 Option Positions and Strategies427 Taxes, Margin, and Commissions 440 Option Pricing445 Computing Option Values 447 Empirical Tests of the Black-Scholes Model 451 Summary453 Questions 455 Problems456 Case: Calipso Capital Consultants 459 References 461 13. RIGHTS, WARRANTS, AND CONVERTIBLES463 Stock Rights 463 Warrants 464 Convertible Securities 469 Summary481 Questions 481 Problems 482 Case: Brian Vandergriff 484 References 485 14. FUTURES 486 Definitions and Comparisons486 Stock Index Futures 487 Portfolio Strategies Using Index Futures493 Index Options and Futures 497 Futures on Fixed-Income Securities501 Futures on Long-Term Securities 505 Foreign Futures Markets515 Summary 515 Questions 516 Problems 517 Case: Orion Financial Management519 References521 15. TECHNICAL ANALYSIS 522 Market Indicators523 Forecasting Individual Stock Performance 532 Other Tests, Conclusions, and Summary543 Questions and Problems 546 Case; McDonald's Corp.547 References549 16. EFFICIENT-MARKET THEORY 550 Fundamental and Technical Analysis550 Random Walk 551 The Efficient-Market Hypothesis552 Empirical Tests of the Semistrong Form563 Summary568 Questions and Problems569 References570 17. PORTFOLIO ANALYSIS 571 Traditional Portfolio Analysis571 Why Portfolios? 572 Effects of Combining Securities573 Markowitz Risk-Return Optimization: An Example586 Portfolio Analysis: An Expanded Example592 Adequate Diversification596 Summary598 Questions 598 Problems 599 References601 18. PORTFOLIO SELECTION 602 Risk and Investor Preferences602 Selecting the Best Portfolio 605 Simple Sharpe Portfolio Optimization610 Significance of Beta in the Portfolio616 Traditional Portfolio Selection622 Summary633 Questions633 Problems 636 Case: QuanTech Partners641 Case: The Conaways 642 Case: George and Emily Alien644 19. CAPITAL MARKET THEORY 648 Capital Market Theory 648 Relaxing Some Assumptions of the Capital Asset Pricing Model655 Testing the Capital Asset Pricing Model656 Arbitrage Pricing Theory 658 Summary660 Questions660 Problems661 References662 20. MANAGED PORTFOLIOS AND PERFORMANCE MEASUREMENTS 663 Classification of Managed Portfolios 663 Alleged Advantages of Managed Protfolios670 Management Performance Evaluation 671 Empirical Tests of Mutual Fund Performance684 Mutual Funds as an Investment 688 Sources of Investment Company Information 689 Summary 692 Questions and Problems 692 Case : The Parallax Fund 695 References 696 INDEX 697