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Investments
N I N T H E D I T I O N
ZVI BODIE
Boston University
ALEX KANE
University of California, San Diego
ALAN J. MARCUS
Boston College
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Bodie, Zvi.
Investments / Zvi Bodie, Alex Kane, Alan J. Marcus.—9th ed.
p. cm.—(The McGra
Includes index.
ISBN-13: 978-0-07-353070-3 (alk. paper)
ISBN-10: 0-07-353070-0 (alk. paper)
1. Inv x. II. Marcus, Alan J. III. Title.
HG4521.B564 2011
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About the Authors
ZVI BODIE ALEX KANE ALAN J. MARCUS
Boston University University of California, Boston College
San Diego
Alan Marcus is the Mario J.
Alex Kane is professor of Gabelli Professor of Finance
of Management at Boston
University. He holds a PhD the Graduate School of Management at Boston
from the Massachusetts College. He received his PhD
Institute of Technology and and P in economics from MIT.
has serv ac- Univ Professor Marcus has been
ard Business San Diego. He has been visit- a visiting professor at the
School and MIT’s Sloan ing professor at the Faculty
School of Management. of Economics, University of Business Administration and
Professor Bodie has published T at MIT’s Sloan School of
ard; Kennedy ed
and investment strategy in School of Gov as a research associate at the
leading professional jour- Harvard; and research asso- National Bureau of Economic
nals. In cooperation with the ciate, National Bureau of Research. Professor Marcus
Research Foundation of the Economic Research. An has published widely in the
CFA Institute, he has recently author of man ets and
produced a series of Webcasts
and a monograph entitled The journals, Professor Kane’s consulting work has ranged
Future of Life Cycle Saving from new-product develop-
and Investing. ment to provision of e
agement, and capital markets, testimony in utility rate
most recently in the measure- proceedings. He also spent
ment of market volatility and 2 years at the Federal Home
pricing of options.
(Freddie Mac), where he
dev
pricing and credit risk. He cur-
rently serves on the Research
F
of the CFA Institute.
v
Brief Contents
Preface xvi
PART III
PART I Equilibrium in Capital
Introduction 1 Markets 280
1 9
The Investment En 1 280
2 10
28 actor
318
3
How Securities Are Traded 59 11
4 The Ef 343
Mutual Funds and Other Investment 12
Companies 92 Behavioral Finance and T
Analysis 381
PART II
13
Portfolio Theory 407
and Practice 117
PART IV
5
Fixed-Income
117 Securities 439
6
Risk Aversion and Capital Allocation 14
to Risky Assets 160 Bond Prices and Yields 439
7 15
Optimal Risk 196 The T 480
8 16
Index Models 246 Managing Bond 508
vi
Brief Contents
PART V PART VII
Security Analysis 5 48
Applied Portfolio
17 Management 819
548
24
18
aluation 819
Equity Valuation Models 583
25
19
Div 863
Financial Statement Analysis 627
26
Hedge Funds 903
PART VI
27
Options, Futures, and v
Other Derivatives 667 Management 926
28
20
Investment Policy and the Framework
Options Mark 667 of the CFA Institute 952
21
Option Valuation 711
TO CFA PROBLEMS 993
22
GLOSSARY G-1
Markets 755
NAME INDEX I-1
23
Futures, Swaps, and Risk Management 784 SUBJECT INDEX I-4
vii
Contents
Preface xvi 2.2 The Bond Market 34
Treasury Notes and Bonds / Inflation-Protected Treasury
PART I Bonds / Federal Agency Debt / International Bonds /
Introduction 1 Municipal Bonds / Corporate Bonds / Mortgages and
Mortgage-Backed Securities
2.3 Equity Securities 41
Chapter 1 Common Stock as Ownership Shares / Characteristics of
The Investment Environment 1 Common Stock / Stock Market Listings / Preferred Stock /
Depository Receipts
1.1 Real Assets versus Financial Assets 2 2.4 Stock and Bond Market Indexes 44
1.2 Financial Assets 4 Stock Market Indexes / Dow Jones Averages / Standard
1.3 Financial Markets and the Economy 5 & Poor’s Indexes / Other U.S. Market-Value Indexes /
The Informational Role of Financial Markets / Equally Weighted Indexes / Foreign and International
Consumption Timing / Allocation of Risk / Separation Stock Market Indexes / Bond Market Indicators
of Ownership and Management / Corporate Governance 2.5 Derivative Markets 51
and Corporate Ethics Options / Futures Contracts
1.4 The Investment Process 8 End of Chapter Material 54–58
1.5 Markets Are Competitive 9
Chapter 3
The Risk–Return Trade-Off / Efficient Markets
How Securities Are Traded 59
1.6 The Players 11
Financial Intermediaries / Investment Bankers 3.1 How Firms Issue Securities 59
Investment Banking / Shelf Registration / Private
1.7 The Financial Crisis of 2008 14
Placements / Initial Public Offerings
Antecedents of the Crisis / Changes in Housing Finance /
3.2 How Securities Are Traded 63
Mortgage Derivatives / Credit Default Swaps / The Rise
Types of Markets
of Systemic Risk / The Shoe Drops / Systemic Risk and the
Real Economy Direct Search Markets / Brokered Markets / Dealer
Markets / Auction Markets
1.8 Outline of the Text 23
Types of Orders
End of Chapter Material 24–27
Market Orders / Price-Contingent Orders
Chapter 2 Trading Mechanisms
Dealer Markets / Electronic Communication
28
Networks (ECNs) / Specialist Markets
2.1 The Money Market 29 3.3 U.S. Securities Markets 68
Treasury Bills / Certificates of Deposit / Commercial NASDAQ / The New York Stock Exchange
Paper / Bankers’ Acceptances / Eurodollars / Repos and Block Sales / Electronic Trading on the NYSE / Settlement
Reverses / Federal Funds / Brokers’ Calls / The LIBOR Electronic Communication Networks / The National
Market / Yields on Money Market Instruments Market System / Bond Trading
viii
Contents
3.4 Market Structure in Other Countries 74 5.2 Comparing Rates of Return for Different Holding
London / Euronext / Tokyo / Globalization Periods 122
and Consolidation of Stock Markets Annual Percentage Rates / Continuous Compounding
3.5 Costs 76 5.3 Bills and 125
3.6 on Margin 76 5.4 and Risk Premiums 127
3.7 Short Sales 79 Holding-Period Returns / Expected Return and Standard
3.8 Regulation of Securities Markets 82 Deviation / Excess Returns and Risk Premiums
Self-Regulation / The Sarbanes-Oxley Act / Insider Trading 5.5 Time Series Analysis of Past Rates of Return 130
End of Chapter Material 86–91 Time Series versus Scenario Analysis / Expected Returns
and the Arithmetic Average / The Geometric (Time-
Chapter 4 Weighted) Average Return / Variance and Standard
Mutual Funds and Other Deviation / The Reward-to-Volatility (Sharpe) Ratio
Investment Companies 92 5.6 The Normal Distribution 134
5.7 Deviations from Normality and Risk Measures 136
4.1 Investment Companies 92
Value at Risk / Expected Shortfall / Lower Partial
4.2 Types of Investment Companies 93
Standard Deviation and the Sortino Ratio
Unit Investment Trusts / Managed Investment
5.8 Historical Retur ortfolios: Equities
Companies / Other Investment Organizations
and Long-Term Government Bonds 139
Commingled Funds / Real Estate Investment
Total Returns / Excess Returns / Performance / A Global
Trusts (REITS) / Hedge Funds
View of the Historical Record
4.3 Mutual Funds 96
5.9 Long-Term Investments 147
Investment Policies
Risk in the Long Run and the Lognormal Distribution /
Money Market Funds / Equity Funds / Sector Funds /
The Sharpe Ratio Revisited / Simulation of Long-Term
Bond Funds / International Funds / Balanced Funds /
Future Rates of Return / Forecasts for the Long Haul
Asset Allocation and Flexible Funds / Index Funds
End of Chapter Material
How Funds Are Sold
4.4 Costs of Inv in Mutual Funds 99 Chapter 6
Fee Structure
Risk Aversion and Capital Allocation
O perating Expenses / Front-End Load / Back-End
to Risky Assets 160
Load / 12b-1 Charges
6.1 and Risk Aversion 161
Fees and Mutual Fund Returns / Late Trading
and Market Timing Risk, Speculation, and Gambling / Risk Aversion
and Utility Values / Estimating Risk Aversion
4.5 Taxation of Mutual Fund Income 103
6.2 Capital Allocation acr ee
4.6 Exchange-Traded Funds 104
Portfolios 167
4.7 Mutual Fund Investment Performance:
6.3 The ee Asset 169
A First Look 106
4.8 Information on Mutual Funds 109 6.4 Portfolios of One Risk ee
Asset 170
End of Chapter Material 112–116
6.5 Tolerance and Asset Allocation 174
PART II Nonnormal Returns
6.6 Passive Strategies: The Capital Market Line 179
Portfolio Theory
End of Chapter Material 182–190
and Practice 117
A v , and the
St. Petersburg Paradox 191
Chapter 5
A
Introduction to Risk, Return, and the of Insurance Contracts 194
Historical Record 117
Chapter 7
5.1 Determinants of the Level of Interest Rates 118
Optimal Risky Portfolios 196
Real and Nominal Rates of Interest / The Equilibrium
Real Rate of Interest / The Equilibrium Nominal Rate 7.1 Div and Portfolio Risk 197
of Interest / Taxes and the Real Rate of Interest 7.2 Portfolios of Two y Assets 199
ix
Contents
7.3 Asset Allocation with Stocks, Bonds, and Bills 206 PART III
The Optimal Risky Portfolio with Two Risky Assets
and a Risk-Free Asset Equilibrium in Capital
7.4 The Markowitz Portfolio Selection Model 211
Markets 280
Security Selection / Capital Allocation and the Separation
Property / The Power of Diversification / Asset Allocation
and Security Selection / Optimal Portfolios and Chapter 9
Nonnormal Returns
The Capital Asset Pricing Model 280
7.5
9.1 The Capital Asset Pricing Model 280
of Long-Term Investments 220
Why Do All Investors Hold the Market Portfolio? / The
Risk Pooling and the Insurance Principle / Risk Pooling /
Passive Strategy Is Efficient / The Risk Premium of
Risk Sharing / Investments for the Long Run
the Market Portfolio / Expected Returns on Individual
End of Chapter Material 224–234
Securities / The Security Market Line
Appendix A: A Spreadsheet Model f
9.2 The CAPM and the Index Model 293
Div 234
Actual Returns versus Expected Returns / The Index
Appendix B: Review of P Statistics 239
Model and Realized Returns / The Index Model and the
Expected Return–Beta Relationship
Chapter 8
9.3 Is the CAPM Practical? 296
Index Models 246 Is the CAPM Testable? / The CAPM Fails Empirical
Tests / The Economy and the Validity of the CAPM / The
8.1 A Single-Factor Security Market 247
Investments Industry and the Validity of the CAPM
The Input List of the Markowitz Model / Normality
9.4 Econometrics and the Expected Return–Beta
of Returns and Systematic Risk
Relationship 300
8.2 The Single-Index Model 249
9.5 Extensions of the CAPM 301
The Regression Equation of the Single-Index Model /
The Zero-Beta Model / Labor Income and Nontraded
The Expected Return–Beta Relationship / Risk and
Assets / A Multiperiod Model and Hedge Portfolios /
Covariance in the Single-Index Model / The Set of
A Consumption-Based CAPM
Estimates Needed for the Single-Index Model / The
Index Model and Diversification 9.6 Liquidity and the CAPM 306
8.3 the Single-Index Model 254 End of Chapter Material 310–317
The Security Characteristic Line for Hewlett-Packard /
The Explanatory Power of the SCL for HP / Analysis Chapter 10
of Variance / The Estimate of Alpha / The Estimate of
Arbitrage Pricing Theory and Multifactor
Beta / Firm-Specific Risk / Correlation and Covariance
Models of Risk and Return 318
Matrix
8.4 Portfolio Construction and the Single-Index 10.1 Multifactor Models: An Ov 319
Model 261 Factor Models of Security Returns / A Multifactor
Alpha and Security Analysis / The Index Portfolio as an Security Market Line
Investment Asset / The Single-Index-Model Input List / 10.2 Arbitrage Pricing Theory 323
The Optimal Risky Portfolio of the Single-Index Model /
Arbitrage, Risk Arbitrage, and Equilibrium / Well-
The Information Ratio / Summary of Optimization
Diversified Portfolios / Betas and Expected Returns /
Procedure / An Example
The One-Factor Security Market Line
Risk Premium Forecasts / The Optimal Risky
10.3 Individual Assets and the 330
Portfolio
The APT and the CAPM
8.5 Practical Aspects of Portfolio Management
10.4 A Multifactor APT 331
268
10.5 Where Should We Look for Factors? 333
Is the Index Model Inferior to the Full-Covariance
Model? / The Industry Version of the Index Model / The Fama-French (FF) Three-Factor Model
Predicting Betas / Index Models and Tracking Portfolios 10.6 A Multifactor CAPM and the APT 336
End of Chapter Material 274–279 End of Chapter Material 336–342
x
