cover

Contents

Cover

Series Page

Title Page

Copyright

Dedication

Preface

Acknowledgments

Chapter 1: Discount Rates and Returns

Estimating Returns

Geometric and Arithmetic Averages

Caveats to Return Extrapolation

Discounting Present Values of Cash Flow Streams

Internal Rate of Return and Yield to Maturity

Real and Nominal Returns

Summary

Chapter 2: Fixed Income Securities

Coupon-Bearing Bonds

Infinite Cash Flow Streams (Perpetuities)

General Pricing Formulas for Finite Cash Flow Streams

Interest Rate Risk

Analysis of Duration

Interest Rate Risk Dynamics

Immunization and Duration

Applications—Liability Discounting and Cash Matching

Pension Logic

Risky Coupons

Inflation Risk and TIPS

A Bond Portfolio Strategy (Optional)

Summary

Appendix 2.1: Solving Infinite and Finite Power Series

Reference

Chapter 3: Term Structure

Discounting Using Spot Rates

Forward Rates

NPV Revisited

Short Rates

The Bootstrap Method

Duration Redux

Summary

Chapter 4: Equity

The Determination of Stock Prices

Discount Rates Redux

Price and Dividend Multiples

Extrapolating Multiples to Forecast Returns

Pitfalls of Trend Analysis

The Gordon Growth Model

Sources of Return

Summary

References

Chapter 5: Portfolio Construction

Stochastic Returns and Risk

Diversification

The Efficient Frontier

Markowitz Portfolio Selection Criteria

Capital Market Line and the CAPM

Performance Evaluation

Summary

Appendix 5.1: Statistical Review

Appendix 5.2: Risk-Adjusted Performance

Reference

Chapter 6: Optimal Portfolios

Portfolio 1: Minimum Variance Portfolio (Fully Invested)

Portfolio 2: Minimum Variance Portfolios with Targeted Return

Portfolio 3: Minimum Variance Portfolios with No Short Sales

Portfolio 4: Minimum Variance Portfolios with Capped Allocations

Portfolio 5: Maximum Risk-Adjusted Return

Performance Attribution

The Efficient Frontier (Again)

Summary

Appendix 6.1: Matrix Operations

Chapter 7: Data and Applications

Analyzing Returns on a 10-Asset Portfolio

Performance Attribution

Changing the Investment Horizon Returns Frequency

Benchmarking to the Market Portfolio

The Cost of Constraints

A Bond Strategy

Summary

Chapter 8: Anomalies

Deviations from the CAPM

Behavioral Finance

Summary

References

Chapter 9: Factor Models

Arbitrage Pricing Theory (APT)

Factor Selection

Model Estimation

Principal Components

Applications and Examples

Summary

References

Chapter 10: Active Portfolio Management

Active Portfolio Construction and Attribution Analysis

Performance Attribution

Summary

Appendix 10.1: Active Space

Chapter 11: Risk

The Failure of VaR

Taxonomy of Risk

Visualizing Risk

Estimating Volatilities

Maximum Likelihood Estimation (Optional)

Credit Risk

Adjusting for Leverage

Adjusting for Illiquidity

Other Risks

Summary

References

Chapter 12: Monte Carlo Methods

Non-Normal Distributions

The Gaussian Copula

Summary

References

Chapter 13: Systemic Risk

Extreme Value Theory

Estimating the Hazards of Downside Risks

A Systemic Risk Indicator

Summary

References

Chapter 14: Incorporating Subjective Views

Methodological Concepts

An Example Using Black-Litterman

Active Space

Risk Attribution

Summary

References

Chapter 15: Futures, Forwards, and Swaps

Institutional Detail and Futures Mechanics

The Relationship between Spot Prices and Forward (Futures) Prices

Hedging Basis Risk

Hedging Portfolio Risk

Futures Pricing

Swaps

Summary

References

Chapter 16: Introduction to Options

Option Payoffs and Put-Call Parity

Pricing European Call Options

Pricing European Put Options

Option Strategies

Real Options

Summary

References

Chapter 17: Models of Stock Price Dynamics

Stock Price Dynamics

Ito Processes

Lognormal Stock Prices

Deriving the Parameters of the Binomial Lattice

Black-Scholes-Merton Model

The Greek Letters

Monte Carlo Methods

Summary

Appendix 17.1: Derivation of Ito's Lemma

Chapter 18: Hedging Portfolio Risk

Simple Hedging Strategies

S&P 500 Index Puts

Selling Volatility

VIX Calls

Liability-Driven Investment

Summary

References

Chapter 19: Private Equity

The Private Equity Model

Return and Risk Methodology

Summary

Appendix 19.1: CAPM

References

Chapter 20: Structured Credit

Securitization

Credit Enhancement

Basics of Pricing Interest Rate Derivatives

Interest Rate Dynamics

CMO Valuation

The Crash of the Housing Bubble

Summary

Reference

Chapter 21: Optimal Rebalancing

Trigger Strategies and No-Trade Regions

An Optimal Control Problem

Implications

Optimal Rebalancing in a Static Optimization Model

The Comparative Statics of Transaction Costs

Reference

Chapter 22: Data Problems

Covariance Estimation

An Example

Empirical Results

Overlapping Observations

Conclusions

Appendix 22.1: Covariance Matrix Estimation

References

About the Author

Index

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