PART ONE
INTROOUCTlON TO INVESTMENTS
1 THE INVESTMENT SETTlNG
2 SECURITYMARKETS:P5ESENTANDFUTURE
3 PARTOPATlNGlNTHEMARKET
4 SOURCES OF INVESTMENT
INFORMATlON
PARTTWO
ANAIYSIS AND VALUATON OF EQUlTY
SECURmEs
5 ECONOMlCACTlVlTY
6 INDUSTRYANALYSlS
7 VALUATlON OF THE INDMDUAL
FlRM
8 FlNANClAL STATEMENT ANALYSlS
PART THREE
ISSUES IN EFFlClENT MARKETS
9 A BASlC VlEW OF TECHNlCAL ANALYSlS
ANDMARKETEFFlClENCY
10 INVESTMENTS IN SPEClAL
SlTUATlONS Zoi
PART FouR
FlXED-lNCOME AND LVERAGED SECURmES
11 BONDS AND FlXED-lNCOME
FUNDAMENTALS
12 PRlNClPLES OF BOND VALUATlON AND
INVESTMENT
l3 DURATlON AND RElNVESTMENT
CONCEPTS
14 CONVERTlBLE SECURmES AND
WARRANTS
PART FivE
DERlVAlVE PROOUCTS
15 PUTANDCALLOPTlONS
16 COMMODmESANDFlNANClAL
FUTURES
17 STOCKlNDEXFUTURESAND
opnoNS
PART SlX
BROADENlNG THE INVESTMENT PERSPECTlVE
18 INTERNATlONALSECURmES
MARKETS
l9 MUTUALFUNDS
20 INVESTMENTSlNREALASSETS
PARTSEVlN
INTRODUCTlON TO PORTTOUO MANAGEMENT
21 A BASlC LOOK AT PORTFOUO
MANAGEMENT AND CAPlTAL MARKET
THEORY
22 MEASURlNG RlSKS AND RETURNS OF
PORTFOUO MANAGERS
APPENDlXES
GLOSSARY
INDEX
ONTENTS
PART ONE
INTRODUCTlON TO INVESTMENTS
l THE INVESTMENT SETTlNG
Forms of Investment
The Setting of Investment Obiectives
Risk and Safety ofPrincipal
Current Income versus Capital
Appreciation
Liquidity Considerations
Short-Term versus Long-Term
Orientation
Tax Factors
Ease ofManagement
Relirement and Estate Planning
Considerations
Profile Analysis
Measures of Risk and Return
Risk
Actual Consideration of Required
Returns
Real Rate ofRetum
Anticipated inflation Factor
Risk Premium
Systematic and Unsystematic Risk
Summary ofRetum Considerations
WhatYouWillLearn
Appendix lA: Investor Risk Profile
Appendix l B: Career Opportunities in
Investments
2 SECURITY MARKETS: PRESENT AND FUTURE
The Market Environment
Market Functions
Market Efficiency and Liquidity
Competition cnd Allocation of Capital
Secondary Markets
Primary Markets
Organization of the Primary Markets: The
Investment Banker
Underwriting Function
Distribution
Investment Bankmg Competition
Organization of the Secondary
Markets
Organized Exchanges
Consolidated Tape
Listing Requirements for Firms
Membership for Market Participants
Other Organized Exchanges
The American Stock Exchange
The Chicago Board Options
Exchange
Futures Markets
Over-the-Counter Markets
NASDAQ
Debt Securities Traded Over-the-
Counter
The Third and Fourth Markets: Part of
Over-the-Counter Trading
The Future of the Capital Markets
The National Market System
Regulation of the Security Markets
Securities Act of l933
Securities Exchange Act of l934
The Securities Acts Amendments
0/7975
Other Legislation
Insider Trading
Program Trading and Market Price
Limits
3 PARTOPATlNG IN THE MARKET
Meosures of Price Performonce: Market
Indexes
Indexes and Averages
Dow Jones Averages
Standard & Poor's Indexes
Value Line Average
Other Market Indexes
Buying and Selling in the Market
Cash or Margin Account
Long or Short?-That Is the Question
Types of Orders
Cost of Trading
Taxes
Capital Gains and Loss Treatment
IRAs and Taxes
4 SOURCES OF INVESTMENT INFORMATlON
Aggregate Economic Data
Federal Reserve Bulletin
Federal Reserve Banks
Federal Reserve Bank of St. Louis
Survey of Current Business
Other Sources ofEconomic Data
Investment Advisory Services
Moody's
Standard & Poor's
Value Line
Momingstar
Other Investment Services
Indexes, SEC Filings, Periodicals, and
Journals
Indexes
Securities and Exchange Commission
Filings
Periodicals and Newspapers
Joumals
Computer Databases
The Use ofMainframe Computers
The Use ofPersonal Computers
information on Nontraditional Markets
Commodity Yearbook
Appendix 4A: Names and Addresses of
Appendix 46: Regional and Branch
OfficesoftheSEC
PART Two
NALYSlS AND VALUATON OF EoUlTY
SECURlTlES
5 ECQNOMlC ACITVTY
Economic Activity and the Business Cycle
Federal Govemment Economic
Policy
Fiscal Policy
Monetary Policy
Govemment Policy, Real Growth and
Inflation
Business Cycles and Cyclical Indicaors
Leading Indicators
Money Supply and Stock Prices
Business Cycles and industry Relationships
6 INDUSTRY ANALYSlS
Industry Life Cycles
Development-Stage l
Growth--Stage H
Expansion-Stage lll
Maturity-Stage IV
Decline-Stage V
Growth in Nongrowth Industries
Industry Structure
Economic Structure
Competitive Structure
Industry Trend Analysis
Industry Groups and Rotational investing
APPENDlX 6A Sustainable Growth
7 VALUATON OF THE INDMDUAL FlRM
Basic Vauation Concepts
Review of Risk and Required Return
Concepts
Dividend Valuation Models
General Dividen5 Model
Constant Growth Model
A Nonconstant Growth Model
Earnings Valuation Models
The Combined Eamings and Dividend
Model
The Price-Earnings Ratio
The P/E Ratiofor Individual Stocks
The Pure, Short-Term Eamings Model
Relating an Individual Stock's P/E Ratio
to the Market
Othtsr Valuation Models Using Averaqe
Price Ratios and 10-YearAverages
Forecasting Eamings Per Share
Least Squares Trendline
The Income Statement Method
Growth Stocks and Growth Companies
199
Assets as a Source of Stock Value
Natural Resources
8 FlNANClAL STATEMENT ANALYSIS
The MaIor Financial Statements
Income Statement
Balance Sheet
Statement of Cash Flows
Key Financial Ratios for the Securily
Analyst
Ratio Anatysis
Bankruptcy Studies
Classification System
Uses of Ratios
Comparing Long-Term Trends
Deficiencies of Financial Statements
Infiation Effects
Inventory Valuation
Extraordinary Gains and Losses
Pension Fund Liabilities
Foreign Exchange Transactions
Other Distortions
PART THREE
IsSUES IN EFFlClENT MARKETS
9 A BASIC VlEW Of TECHNKAL ANlAlYSlS AND MARKET
EFFlClENCY
Technical Analysis
The Use of Charting
Essential Elements of the Dow
Theory
Support and Resistance Levels
Volume
Types of Charts
Key Indicator Series
Contrary Opinion Rules
Smart Money Rules
Overall Market Rules
Efficient Market Hypothesis
Weak Form of the Efficient Market
Hypothesis
Tests of Independence
Trading Rule Tests
Implications for Technical Analysis
Semistrong Form of the Efficient Market
Hypothesis
Implications for Fwidamental Analysis
Strong Form of the Efficient Market
Hypothesis
10 INVESTMENTS IN SPEclAL SITTUATONS
Mergers and Acquisitions
Premiwns for Acquired Company
Acquiring Company Performance
Form ofPayment
Leveraged Buyouts
New Stock Issues
Performance oflnvestment Bankers
Factors to Consider in a New Issue
Exchange Listings
Stock Repurchase
Reasonsfor Repurchase
Actual Market Effect
The Small-Firm and Low-P/E-Ratio Eflect
The Latest Theory-The Book Value to
MarketValueEffect
Other Stock-Related Special Situations
Truly Superior Retums or Mismeasurement?
PART FOUR
FlXED-lNCOME AND LEVERAGED SECURlTlES
ll BOND AND FlXED-lNCOME FUNDAMENTALS
The Bond Contract
Secured and Unsecured Bonds
The Composition of the Bond Market
U.S. Govemment Securities
Federally Sponsored Credit Agency
Issues
State and Local Govemment
Securities
Corporate Securities
Bond Market Unvestors
Distribution Procedures
Private Placement
Bond Ratings
Actual Rating System
Junk Bonds
Bond Quotes
Bond Markets, Capital Market Theory, and
Efficiency
Other Forms of Fixed-lncome Securities
Preferred Stock as an Altemative to Debt
Features ofPreferred Stock
Appendix l lA: Evaluation of Debt
Innovations
12 PRlNClPlES Of BOND VALUATlON AND
iNVESTMENT
Fundamentals of the Bond Valuation
Process
Rates of Retum
Current Yield
Yield to Maturity
Yield to Call
Anticipated Realized Yield
Reinvestment Assumption
The Movement of interest Rates
Term Structure oflnterest Rates
investment Strategy: interest-Rate
Considerations
Bond-Pricing Rules
Example of interest-Rate Change
Deep Discount versus Par Bonds
Yield Spread Considerations
Bond Swaps
Appendix l 2A: Interpolating to Find Yield
to Maturity
13 DURATON AND RElNVESTMENT CONCEPTS
Review of Basic Bond Valuation Concepb
Duration
Duration and Price Sensitivity
Duration and Market Rates
Duration and Coupon Rates
Bringing Togerfier the Influences on
Duration
Duration and Zero-Coupon Bonds
The Uses of Duration
Bond Reinvestment Assumptions and
Terminal Wealth Analysis
Reinvestment Assumptions
Terminal Wealth A.nalysis
Zeiv-Coupon Bonds and Tenninal
Wealth
14 CoNVERTlBlE SECURlHES AND WARRANTS
Convertible Securities
Conversion Price and Cohversion Ratio
Value ofthe Convertible Bond
Bond Price and Premiums
Comparison with Common Stock
Disadvantages of Convertibles
When to Convert into Common Stock
Advantages and Disadvantaqes to the
Issuing Corporation
Accounting Considerations With
Convertibles
Innovations in Convertible Securities
Speculating Through Warrants
Valuation of Warrants
Use of Warrants by Corporations
Accounting Considerations with Warrants
PART FIVE
DERlVATlVE PRODUCTS
15 PuTANDCAllOlTlONS
Options Markets
Listed Options Exchanges
The Options Clearing Corporation
Option Premiums
Intrinsic Value
Speculative Premium
Basic Option Strategies
Buying Call Options
Writing Call Options
Buying Put Options
Using Options in Combinations
Spreads
Straddles
Other Option Considerations
Appendix 15A: The Black-Scholes Option
Pricing Model
16 CoMMODlTlES AND FlNANClAL FUTURES
Types of Commodities and Exchanges
Types of Commodities Contracts
Actual Commodities Contract
Margin Requirements
Market Conditions
Gains and Losses
Price Movement Limitations
Reading Market Quotes
The Cash Market and the Futures Market
The Futures Market for Financial
Instruments
Currency Futures
lnterestRate Futures
Hedging with Interest-Rate Futures
An Actual Example
Options as Well as Futures
Interest-Rate Swaps
l7 STOCK INDEX FUWRES AND OlTlONS
The Concept of Derivative Products
Trading Stock Index Futures
Trading Cycle
Margin Requirement
Minimum Price Change
Cash Settlement
Basis
Overall Feature
Use of Stock index Futures
Speculation
Hedging
Arbitraging
Trading Stock Index Options
Actual Trade in the S&P l00 Index
Hedging with Stock Iindex Options
Options on Stock Index Futures
PART SIx
BROADENlNG THE INVESTMENT PERSPECTlVE
18 INTERNATlONAL SeCURlTIES MARKETS
The World Equity Market
Diversification Benefits
Retum Potential in International Markets
Current Quotations on Foreign Market
Performance
Other Market Differences
Currency Fluctuations and Rates of Return
Other Obstacles to Intemational Investments
Political Risks
Tax Problems
Lack ofMarket Efficiency
Administrative Problems
Information Difficulties
Methods of Participating in Foreign
Investments
Direct Investments
Indirect Investments
19 MUTUAL FUNDS
Advantages and Disadvantages of Mutual
Funds
Closed-End Versus Open-End Funds
Investing in Open-End Funds
Load versus No-Load Funds
No-Load Funds
Differing ObIectives and the Diversity of
Mutual Funds
Matching Investment Objectives with
Fund Types
The Prospectus
Distribution and Taxation
Shareholder Services
Investment Funds, Long-Tenn Planning, and
Dollar-Cost Averaging
Evaluating Fund Performance
Lipper Mutual Fund Performance
Averages
Computing Total Retum on Your
Investment
Appendix l 19A: Unit Investment Trusts (UlTs)
20 INVESTMENTS IN REAL ASSETS
Advantages and Disadvantages of Real
Assets
Real Estate as an Investment
Real Estate in the Last Decade and the
Future Outlook
An Actual Example
Depreciation Effects
Cash Flow Considerations
Financing of Real Estate
New Types ofMortgages
Forms of Real Estate Ownership
Individual or Regular Partnership
Syndicate or Limited Partnership
Real Estate Investment Trust
Gold and Silver
Gold
Silver
Precious Gems
Other Collectibles
PART SEVKN
INTROOUCTlON
TO PORTFOUO MANAGEMENT
2l A BASIC LOOK AT PORTFOUO MANAGEMENT AND
CAPlTAL MARKET THEORY
Formal Measurement of Risk
Expected Value
Standard Deviation
Portfolio Effect
Standard Deviation for a Two-Asset
Portfolio
Developing an Efficient Portfolio
Risk-Retum Indifference Curves
Optimum Portfolio
Capital Asset Pricing Model
Capital Market Line
Retum on an Individual Security
Systematic and Unsystematic Risk
Security Market Line
Assumptions of the Capital Asset Pricing
Model
Arbitrage Pricing Theory
Application to Portfolio
Management
Appendix21A: The Correlation Coefficient
Appendix 21B: Least Squares Regression
Analysis
Appendix 21C: Derivation of the Security
Market Line (SML)
22 MEASUMNG RlSKS AND RETURNS OF PORTFOUO
MANAGERS
Stated Obiectives and Risk
Measurement of Return in Relation to Risk
Sharpe Approach
Treynor Approach
Jensen Approach
Adequacy of Performance
Diversification
Other Assets as Well as Stocks
A Specific Example-Asset Allocation
The Makeup of institutional investors
investment Companies (including Mutual
Funds)
Other Institutional Investors
APPENDHXES
APPENDlX A COMPOUND SUM OF $1
ApPENDlX B COMPOUND SUM Of AN ANNUlTY
Of$l
APPENMX C PRESENT VALUE OF $!
ApPENDlX D PRESENT VALUE OF AN ANNUlTY
OfSl
ApPENDlX E TlME VALUE OF MONEY AND
INVESTMENT APPUCATONS
ApKNDlX F USING CALCUlATORS FOR FlNANClAl
ANAlYSlS
GtOSSARY
INDEX
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