Portfolio Construction, Management, and Protection (with Stock-Trak Coupon)

Learn the details of traditional investment as well as portfolio theory with the straightforward, manageable approach found in Strong's successful PORTFOLIO CONSTRUCTION, MANAGEMENT, AND PROTECTION, 5E. You'll learn how to save time and money as this applications-oriented book guides you from theory to practice. You'll see the small and large investor in action as unique topics introduce you to fiduciary duty, investment policy, and other subjects not found in other texts. References throughout the book to material covered in the CFA exam and questions drawn from the CFA exam help you prepare for testing and professional success. 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Between Risk and Return 40 The Concept of Return 47 Some Statistical Facts of Life 53 SUMMARY 65 QUESTIONS 66 PROBLEMS 67 INTERNET EXERCISES 69 FURTHER READING 70 Chapter 3: Setting Portfolio Objectives 71 Key Terms 71 Introduction 71 Why Setting Objectives Can Be Difficult 72 Portfolio Objectives 74 The Importance of Primary and Secondary Objectives 81 Other Factors to Consider in Establishing Objectives 82 Portfolio Dedication 85 SUMMARY 87 QUESTIONS 88 PROBLEMS 89 INTERNET EXERCISES 91 FURTHER READING 92 APPENDIX: Mutual Fund Evaluation Term Project 93 Chapter 4: Investment Policy 101 Key Terms 101 Introduction 101 The Purpose of Investment Policy 102 Elements of a Useful Investment Policy 109 Risk and Return Considerations: Different Investors 114 Critiquing and Revising the Investment Policy Statement 118 SUMMARY 120 QUESTIONS 120 PROBLEMS 121 INTERNET EXERCISE 129 FURTHER READING 129 APPENDIX: Sample Statements of Investment Policy 130 PART TWO: Portfolio Construction 148 Chapter 5: The Mathematics of Diversification 150 Key Terms 150 Introduction 150 Linear Combinations 151 Single-Index Model 157 Multi-Index Model 160 Chapter 6: Why Diversification Is a Good Idea 165 Key Terms 165 Introduction 165 Carrying Your Eggs in More Than One Basket 165 Role of Uncorrelated Securities 167 Lessons from Evans and Archer 180 Diversification and Beta 184 Capital Asset Pricing Model 185 Equity Risk Premium 188 Using a Scatter Diagram to Measure Beta 189 Importance of Logarithms 192 Arbitrage Pricing Theory 192 APPENDIX: Stochastic Dominance 204 Chapter 7: International Investment and Diversification 216 Key Terms 216 Introduction 216 Why International Diversification Makes Theoretical Sense 217 Foreign Exchange Risk 221 Investments in Emerging Markets 234 Political Risk 244 Other Topics Related to International Diversification 248 Chapter 8: The Capital Markets and Market Efficiency 257 Key Terms 257 Introduction 257 Role of the Capital Markets 257 Efficient Market Hypothesis 260 Anomalies 270 Chapter 9: Picking the Equity Players 283 Key Terms 283 Introduction 283 Stock Selection Philosophy: Fundamental and Technical Analysis 284 Dividends and Why They Really Do Not Matter 284 Investment Styles 297 Categories of Stock 305 Chapter 10: Equity Valuation Tools 313 Key Terms 313 Introduction 313 The Stock Price as a Present Value 313 Changes in the Stock Price and Relative Valuation 319 Chapter 11: Security Screening 325 Key Terms 325 Introduction 325 Why Screening Is Necessary 325 What Constitutes a Good Screen? 327 Screening Processes 328 Library Information 336 Internet Resources 339 Chapter 12: Bond Pricing and Selection 346 Key Terms 346 Introduction 346 Review of Bond Principles 347 Bond Pricing and Returns 351 Bond Risk 363 The Meaning of Bond Diversification 371 Choosing Bonds 372 Example: Monthly Retirement Income 376 Chapter 13: The Role of Real Assets 389 Key Terms 389 Introduction 389 Real Estate in General 390 Timberland in Particular 393 Real Estate Investment Trusts 403 Types of Real Estate Value 404 Gold 405 Chapter 14: Alternative Assets 417 Key Terms 417 Introduction 417 Infrastructure 417 Hedge Funds 420 Commodities 424 Private Equity 425 Opportunistic Real Estate 427 PART THREE: Portfolio Management 430 Chapter 15: Revision of the Equity Portfolio 432 Key Terms 432 Introduction 432 Active Management versus Passive Management 432 Tactical Asset Allocation 443 When Do You Sell Stock? 452 Chapter 16: Revision of the Fixed-Income Portfolio 461 Key Terms 461 Introduction 461 Passive versus Active Management Strategies 461 Bond Convexity (Advanced Topic) 470 Chapter 17: Principles of Options and Option Pricing 482 Key Terms 482 Introduction 482 Option Principles 483 Option Pricing 490 Chapter 18: Option Overwriting 506 Key Terms 506 Introduction 506 Using Options to Generate Income 506 Combined Hedging/Income Generation Strategies 522 Multiple Portfolio Managers 525 Chapter 19: Performance Evaluation 530 Key Terms 530 Introduction 530 Importance of Measuring Portfolio Risk 530 Traditional Performance Measures 534 Dollar-Weighted and Time-Weighted Rates of Return 544 Performance Evaluation with Cash Deposits and Withdrawals 545 Performance Evaluation When Options Are Used 550 Chapter 20: Fiduciary Duties and Responsibilities 561 Key Terms 561 Introduction 561 History 562 Fiduciary Duties 567 Emerging Areas 572 PART FOUR: Portfolio Protection and Emerging Topics 584 Chapter 21: Principles of the Futures Market 586 Key Terms 586 Introduction 586 Futures Contracts 587 Market Mechanics 590 The Clearing Process 596 Principles of Futures Contract Pricing 600 Foreign Currency Futures 604 Chapter 22: Benching the Equity Players 609 Key Terms 609 Introduction 609 Using Options 609 Using Futures Contracts 615 Dynamic Hedging 623 Chapter 23: Removing Interest-Rate Risk 631 Key Terms 631 Introduction 631 Interest-Rate Futures Contracts 631 Concept of Immunization 638 Chapter 24: Integrating Derivative Assets and Portfolio Management 652 Key Terms 652 Introduction 652 Setting the Stage 652 Meeting an Income Constraint 657 Risk Management 659 Managing Cash Drag 668 Chapter 25: Contemporary Issues in Portfolio Management 673 Key Terms 673 Introduction 673 Exchange-Traded Funds 673 Security Analyst Objectivity 674 Stock Lending 675 Certificateless Trading 681 Proxy Voting 682 Role of Derivative Assets 683 Portfolio Margining 684 Islamic Finance 684 Principles-based versus Rules-based Financial Oversight 685 Structured Products 686 The Chartered Financial Analyst Program 686 Regulation Fair Disclosure 690 GLOSSARY 696 INDEX 714 Front Cover......Page 1 Title Page......Page 2 Copyright......Page 3 Summary of Contents......Page 5 CONTENTS......Page 6 PREFACE......Page 14 PART ONE: Background, Basic Principles, and Investment Policy......Page 18 Introduction......Page 20 Part One: Background, Basic Principles, and Investment Policy......Page 22 Part Two: Portfolio Construction......Page 25 Part Three: Portfolio Management......Page 26 Part Four: Portfolio Protection and Contemporary Issues......Page 28 INTERNET EXERCISE......Page 29 Introduction......Page 31 Valuation......Page 32 Safe Dollars and Risky Dollars......Page 34 Relationship Between Risk and Return......Page 40 The Concept of Return......Page 47 Some Statistical Facts of Life......Page 53 SUMMARY......Page 65 QUESTIONS......Page 66 PROBLEMS......Page 67 INTERNET EXERCISES......Page 69 FURTHER READING......Page 70 Introduction......Page 71 Why Setting Objectives Can Be Difficult......Page 72 Portfolio Objectives......Page 74 The Importance of Primary and Secondary Objectives......Page 81 Other Factors to Consider in Establishing Objectives......Page 82 Portfolio Dedication......Page 85 SUMMARY......Page 87 QUESTIONS......Page 88 PROBLEMS......Page 89 INTERNET EXERCISES......Page 91 FURTHER READING......Page 92 APPENDIX: Mutual Fund Evaluation Term Project......Page 93 Introduction......Page 101 The Purpose of Investment Policy......Page 102 Elements of a Useful Investment Policy......Page 109 Risk and Return Considerations: Different Investors......Page 114 Critiquing and Revising the Investment Policy Statement......Page 118 QUESTIONS......Page 120 PROBLEMS......Page 121 FURTHER READING......Page 129 APPENDIX: Sample Statements of Investment Policy......Page 130 PART TWO: Portfolio Construction......Page 148 Introduction......Page 150 Linear Combinations......Page 151 Single-Index Model......Page 157 Multi-Index Model......Page 160 Carrying Your Eggs in More Than One Basket......Page 165 Role of Uncorrelated Securities......Page 167 Lessons from Evans and Archer......Page 180 Diversification and Beta......Page 184 Capital Asset Pricing Model......Page 185 Equity Risk Premium......Page 188 Using a Scatter Diagram to Measure Beta......Page 189 Arbitrage Pricing Theory......Page 192 APPENDIX: Stochastic Dominance......Page 204 Introduction......Page 216 Why International Diversification Makes Theoretical Sense......Page 217 Foreign Exchange Risk......Page 221 Investments in Emerging Markets......Page 234 Political Risk......Page 244 Other Topics Related to International Diversification......Page 248 Role of the Capital Markets......Page 257 Efficient Market Hypothesis......Page 260 Anomalies......Page 270 Introduction......Page 283 Dividends and Why They Really Do Not Matter......Page 284 Investment Styles......Page 297 Categories of Stock......Page 305 The Stock Price as a Present Value......Page 313 Changes in the Stock Price and Relative Valuation......Page 319 Why Screening Is Necessary......Page 325 What Constitutes a Good Screen?......Page 327 Screening Processes......Page 328 Library Information......Page 336 Internet Resources......Page 339 Introduction......Page 346 Review of Bond Principles......Page 347 Bond Pricing and Returns......Page 351 Bond Risk......Page 363 The Meaning of Bond Diversification......Page 371 Choosing Bonds......Page 372 Example: Monthly Retirement Income......Page 376 Introduction......Page 389 Real Estate in General......Page 390 Timberland in Particular......Page 393 Real Estate Investment Trusts......Page 403 Types of Real Estate Value......Page 404 Gold......Page 405 Infrastructure......Page 417 Hedge Funds......Page 420 Commodities......Page 424 Private Equity......Page 425 Opportunistic Real Estate......Page 427 PART THREE: Portfolio Management......Page 430 Active Management versus Passive Management......Page 432 Tactical Asset Allocation......Page 443 When Do You Sell Stock?......Page 452 Passive versus Active Management Strategies......Page 461 Bond Convexity (Advanced Topic)......Page 470 Introduction......Page 482 Option Principles......Page 483 Option Pricing......Page 490 Using Options to Generate Income......Page 506 Combined Hedging/Income Generation Strategies......Page 522 Multiple Portfolio Managers......Page 525 Importance of Measuring Portfolio Risk......Page 530 Traditional Performance Measures......Page 534 Dollar-Weighted and Time-Weighted Rates of Return......Page 544 Performance Evaluation with Cash Deposits and Withdrawals......Page 545 Performance Evaluation When Options Are Used......Page 550 Introduction......Page 561 History......Page 562 Fiduciary Duties......Page 567 Emerging Areas......Page 572 PART FOUR: Portfolio Protection and Emerging Topics......Page 584 Introduction......Page 586 Futures Contracts......Page 587 Market Mechanics......Page 590 The Clearing Process......Page 596 Principles of Futures Contract Pricing......Page 600 Foreign Currency Futures......Page 604 Using Options......Page 609 Using Futures Contracts......Page 615 Dynamic Hedging......Page 623 Interest-Rate Futures Contracts......Page 631 Concept of Immunization......Page 638 Setting the Stage......Page 652 Meeting an Income Constraint......Page 657 Risk Management......Page 659 Managing Cash Drag......Page 668 Exchange-Traded Funds......Page 673 Security Analyst Objectivity......Page 674 Stock Lending......Page 675 Certificateless Trading......Page 681 Proxy Voting......Page 682 Role of Derivative Assets......Page 683 Islamic Finance......Page 684 Principles-based versus Rules-based Financial Oversight......Page 685 The Chartered Financial Analyst Program......Page 686 Regulation Fair Disclosure......Page 690 GLOSSARY......Page 696 INDEX......Page 714 Ideal for schools which do not have a portfolio course, this text accomplishes the objectives of a traditional investments course and a portfolio theory course, and also includes numerous references and questions from the CFA exam