Security Analysis and Portfolio Management, 9ed (An Indian Adaptation)

Edwin J. Elton, Martin J. Gruber, Stephen J. Brown, William N. Goetzmann, Sheeba Kapil

ISBN: 9789377067489
754 pages

Edition ₹1,199.00

Description

A globally acclaimed investment text adapted rigorously for Indian markets. Integrates Indian regulations, market structures, and contemporary data throughout. Balances strong theoretical foundations with real-world Indian case studies. Covers security analysis, portfolio theory, CAPM, APT, and derivatives end-to-end. Designed for MBA, M.Com, CFA® and FRM®-aligned finance programs. Ideal for building both conceptual clarity and practical investment insight.

About the Author

EDWIN J. ELTON is Nomura Professor of Finance at the Stern School of Business of New York University. He has authored or coauthored eight books and more than 100 articles. These articles have appeared in journals such as The Journal of Finance, The Review of Financial Studies, Review of Economics and Statistics, Management Science, Journal of Financial Economics, Journal of Business, Oxford Economic Papers, and Journal of Financial and Quantitative Analysis. He has been coeditor of the Journal of Finance. Professor Elton has been a member of the Board of Directors of the American Finance Association and an Associate Editor of Management Science. He is Associate Editor of Journal of Banking and Finance and Journal of Accounting Auditing and Finance. Professor Elton has served as a consultant for many major financial institutions. A compendium of articles by Professor Elton and Professor Gruber has recently been published in two volumes by MIT press. Professor Elton is a past president of the American Finance Association, a fellow of that association, and a recipient of distinguished research award by the Eastern Finance Association.

MARTIN J. GRUBER is Nomura Professor of Finance and past Chairman of the Finance Department at the Stern School of Business of New York University. He is a fellow of the American Finance Association. He has published nine books and more than 100 journal articles in journals such as The Journal of Finance, The Review of Financial Studies, Review of Economics and Statistics, Journal of Financial Economics, Journal of Business, Management Science, Journal of Financial and Quantitative Analysis, Operations Research, Oxford Economic Papers, and The Journal of Portfolio Management. He has been coeditor of the Journal of Finance. He has been President of the American Finance Association, a Director of the European Finance Association, a Director of the American Finance Association, and a Director of both the Computer Applications Committee and the Investment Technology Symposium of the New York Society of Security Analysts. He was formerly Finance Department Editor for Management Science. Professor Gruber has consulted in the areas of Investment Analysis and Portfolio Management with many major financial institutions. He is currently a director of DWS Mutual Funds, and a Director of the Diawa closed-end funds. He is formerly a director of TIAA, a director and chairman of CREF, and a director of the S. G. Cowen Mutual Funds.

STEPHEN J. BROWN is David S. Loeb Professor of Finance and Coordinator of Undergraduate Finance at the Leonard N. Stern School of Business, New York University. He has served on the Board of Directors of the American Finance Association, was founding editor of The Review of Financial Studies and is currently a member of the Board of the Society of Quantitative Analysis. He is a Managing Editor of the Journal of Financial and Quantitative Analysis and has served on the editorial boards of The Journal of Finance, Pacific-Basin Finance Journal, and other journals. He has published numerous articles and four books on finance and economics related areas. In 1996 he served on the nominating committee for the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. He has served as an expert witness for the U.S. Department of Justice.

WILLIAM N. GOETZMANN is Edwin J. Beinecke Professor of Finance and Management Studies at the Yale School of Management and Director, International Center for Finance at the Yale School of Management and has served on the Board of Directors of the American Finance Association. His published research topics include global investing, forecasting stock markets, selecting mutual fund managers, housing as investment, and the risk and return of art. Professor Goetzmann has a background in arts and media management. As a documentary filmmaker, he has written and coproduced programs for Nova and the American Masters series, including a profile of the artist Thomas Eakins. A former director of Denver's Museum of Western Art, Professor Goetzmann coauthored the award winning book, The West of the Imagination.

Dr Sheeba Kapil is Professor and HoD in Finance at the Indian Institute of Foreign Trade (IIFT), New Delhi,

India. With over 28 years of experience in teaching, research, academic leadership, and institutional development, doctoral supervision, curriculum innovation, and accreditation engagement. Dr Kapil has held several leadership roles including Head, Graduate Studies in Management Division, Head, International Collaboration & Capacity Development, and Head, Journal Division. Over the years, she has contributed to institutional governance through membership in the Academic Council, Finance Committee, Board of Studies, IQAC and accreditation processes, and actively involved in AACSB, AMBA, EQUIS NAAC, NBA accreditation processes, contributing to research visibility, and global academic partnerships. She has conducted faculty development programs for several leading business schools like Audencia Business School France, VISAS Vietnam, IFM Tanzania etc.

UNIT 1 INTRODUCTION 1

Chapter 1 Introduction 2

Outline of the Book 2

Indian Economy Status and Outlook 3

India’s Financial Markets 4

The Economic Theory of Choice:

An Illustration Under Certainty 7

Conclusion 11

Multiple Assets and Risk 11

Questions and Problems 12

Bibliography 13

Chapter 2 Understanding Financial Market 14

Types of Marketable Financial Securities 14

The Return Characteristics of Alternative

Security Types 22

Stock Market Indexes 24

Indian Stock Market Indexes 25

Bond Market Indexes 26

Conclusion 27

Questions and Problems 27

Chapter 3 Financial Markets and Trading 29

Trading Mechanics 29

Margin 32

Markets 36

Trade Types and Costs 43

Conclusion 44

Questions and Problems 44

UNIT 2 SECURITY ANALYSIS 47

Chapter 4 Efficient Markets 48

Early Development 48

The Next Stages of Theory 49

Recent Theory 51

Some Background 52

Testing the EMH 53

Tests of Return Predictability 54

Tests on Prices and Returns 54

Monthly Patterns 56

Announcement and Price Return 68

Methodology of Event Studies 68

Strong-Form Efficiency 73

Market Rationality 76

Conclusion 78

Questions and Problems 78

Bibliography 78

Chapter 5 Behavioral Finance, Investor Decision

Making, and Asset Prices 90

Prospect Theory and Decision Making

Under Uncertainty 90

Biases From Laboratory Experiments 93

Summary of Investor Behavior 96

Behavioral Finance and Asset Pricing Theory 96

Bibliography 103

Chapter 6 Company Analysis–Earning and Growth 107

The Elusive Number Called Earnings 107

The Importance of Earnings 110

Characteristics of Earnings and

Earnings Forecasts 113

Conclusion 121

Questions and Problems 121

Bibliography 121

Chapter 7 Equity Research and Valuation Process 124

Discounted Cash Flow Models 125

Constant Growth Model 127

Cross-Sectional Regression Analysis 136

An Ongoing System 140

Conclusion 145

Questions and Problems 145

Bibliography 149

Chapter 8 Evaluation of Security Analysis 153

Why the Emphasis on Earnings? 153

The Evaluation of Earnings Forecasts 155

Evaluating the Valuation Process 162

Conclusion 164

Questions and Problems 165

Bibliography 165

Chapter 9 Interest Rate Theory and the Pricing of Bonds 167

An Introduction to Debt Securities 168

The Many Definitions of Rates 170

Bond Prices and Spot Rates 178

Determining Spot Rates 179

The Determinants of Bond Prices 181

Collateral Mortgage Obligations 197

The Financial Crisis of 2008 198

Conclusion 199

APPENDIX A Special Considerations in

Bond Pricing 199

APPENDIX B Estimating Spot Rates 200

APPENDIX C Calculating Bond Equivalent Yield

and Effective Annual Yield 202

Questions and Problems 202

Bibliography 205

Chapter 10 The Management of Bond Portfolios 209

Duration 209

Protecting Against Term Structure Shifts 217

Bond Portfolio Management of Yearly Returns 221

Swaps 229

APPENDIX A Duration Measures 231

APPENDIX B Exact Matching Programs 235

APPENDIX C Bond-Swapping Techniques 237

APPENDIX D Convexity 238

Questions and Problems 239

Bibliography 241

UNIT 3 PORTFOLIO ANALYSIS 245

PART I MEAN VARIANCE PORTFOLIO THEORY 247

Chapter 11 Risk and Return 248

Determining the Average Outcome 249

A Measure of Dispersion 250

Variance of Combinations of Assets 253

Characteristics of Portfolios in General 256

Two Concluding Examples 265

Domestic Foreign Allocation 267

Conclusion 268

Questions and Problems 268

Bibliography 271

Chapter 12 Delineating Efficient Portfolios 273

Combinations of Two Risky Assets Revisited: Short Sales Not Allowed 273

The Shape of the Portfolio Possibilities Curve 283

The Efficient Frontier with Riskless Lending and Borrowing 290

Examples and Applications 294

Three Examples 297

Conclusion 300

Questions and Problems 301

Bibliography 303

Chapter 13 Techniques for Calculating the Efficient Frontier 305

Short Sales Allowed with Riskless Lending and Borrowing 305

Short Sales Allowed: No Riskless Lending and Borrowing 310

Riskless Lending and Borrowing with Short Sales Not Allowed 311

No Short Selling and No Riskless Lending and Borrowing 312

The Incorporation of Additional Constraints 312

An Example 313

Conclusion 316

APPENDIX A An Alternative Definition of Short Sales 316

APPENDIX B Determining the Derivative 317

APPENDIX C Solving Systems of Simultaneous Equations 321

APPENDIX D A General Solution 324

APPENDIX E Quadratic Programming and Kuhn–Tucker Conditions 329

Questions and Problems 331

Bibliography 334

PART 2 THE PORTFOLIO SELECTION PROCESS 337

Chapter 14 The Correlation Structure of Security Returns—The Single-Index Model 338

The Inputs to Portfolio Analysis 339

Single-Index Models: An Overview 340

Characteristics of the Single-Index Model 345

Estimating Beta 347

The Market Model 360

An Example 360

Questions and Problems 362

Bibliography 365

Chapter 15 The Correlation Structure of Security Returns—Multi-Index Models and Grouping Techniques 369

Multi-Index Models 370

Average Correlation Models 375

Mixed Models 376

Fundamental Multi-Index Models 376

Conclusion 382

APPENDIX A Procedure For Reducing Any Multi-Index Model to a Multi-Index Model with Orthogonal Indexes 382

APPENDIX B Mean Return, Variance, and Covariance of a Multi-Index Model 383

Questions and Problems 385

Bibliography 388

Chapter 16 Simple Techniques for Determining the Efficient Frontier 391

The Single-Index Model 392

Security Selection with a Purchasable Index 403

The Constant Correlation Model 404

Other Return Structures 407

An Example 408

Conclusion 409

APPENDIX A Single-Index Model—Short Sales Allowed 409

APPENDIX B Constant Correlation Coefficient— Short Sales Allowed 412

APPENDIX C Single-Index Model—Short Sales Not Allowed 413

APPENDIX D Constant Correlation Coefficient— Short Sales Not Allowed 415

APPENDIX E Single-Index Model, Short Sales Allowed, and a Market Asset 416

Questions and Problems 417

Bibliography 419

PART 3 SELECTING THE OPTIMUM PORTFOLIO 421

Chapter 17 Estimating Expected Returns 422

Aggregate Asset Allocation 422

Forecasting Individual Security Returns 428

Portfolio Analysis with Discrete Data 431

APPENDIX The Ross Recovery Theorem—A New Approach to Using Market Data to Calculate Expected Return 432

Questions and Problems 435

Bibliography 436

Chapter 18 How to Select among the Portfolios in the Opportunity Set 438

Choosing Directly 438

An Introduction to Preference Functions 439

Risk Tolerance Functions 442

Safety First 444

Maximizing the Geometric Mean Return 449

Value at Risk (VaR) 452

Utility and the Equity Risk Premium 453

Optimal Investment Strategies with Investor Liabilities 454

Liabilities and Safety-First Portfolio Selection 458

Simulations in Portfolio Choice 458

Conclusion 465

APPENDIX The Economic Properties of Utility Functions 465

Relative Risk Aversion and Wealth 466

Questions and Problems 467

Bibliography 470

Chapter 19 Option Pricing Theory 473

Types of Options 473

Some Basic Characteristics of Option Values 479

Valuation Models 483

Artificial Or Homemade Options 494

Uses of Options 495

Conclusion 498

APPENDIX A Derivation of the Binomial Formula 498

APPENDIX B Derivation of the Black–Scholes Formula 501

Questions and Problems 503

Bibliography 505

PART 4 WIDENING THE SELECTION UNIVERSE 511

Chapter 20 The Valuation and Uses of Financial Futures 513

Description of Financial Futures 513

Valuation of Financial Futures 518

The Uses of Financial Futures 523

Nonfinancial Futures and Commodity Funds 526

Questions and Problems 527

Bibliography 529

Chapter 21 International Diversification 531

Historical Background 531

Calculating the Return on Foreign Investments 532

The Risk of Foreign Securities 536

Market Integration 543

Returns From International Diversification 543

The Effect of Exchange Risk 545

Return Expectations and Portfolio Performance 546

Emerging Markets 548

Other Evidence on Internationally Diversified Portfolios 550

Sovereign Funds 556

Models For Managing International Portfolios 557

Conclusion 560

Questions and Problems 560

Bibliography 563

Chapter 22 Capital Asset Pricing Model 568

The Assumptions Underlying the Standard Capital Asset Pricing Model (CAPM) 568

The CAPM 569

Prices and the CAPM 578

Conclusion 580

APPENDIX Appropriateness of the Single-Period

Asset Pricing Model 581

Questions and Problems 585

Bibliography 586

UNIT 4 MODELS OF EQUILIBRIUM IN THE CAPITAL MARKET 589

Chapter 23 Alternative Forms of Capital Asset Pricing Models 590

Short Sales Disallowed 591

Modifications of Riskless Lending and Borrowing 591

Personal Taxes 601

Nonmarketable Assets 602

Heterogeneous Expectations 604

Nonprice-Taking Behavior 605

Multiperiod CAPM 605

The Multi-Beta CAPM 606

Consumption CAPM 606

Conclusion 608

APPENDIX Derivation of the General

Equilibrium with Taxes 608

Questions and Problems 611

Bibliography 612

Chapter 24 Empirical Tests of Equilibrium Models 618

The Models—Ex Ante Expectations and Ex Post Tests 618

Empirical Tests of the CAPM 620

Testing Some Alternative Forms of the

CAPM Model 630

Testing the Posttax Form of the CAPM Model 630

Some Reservations About Traditional Tests of

General Equilibrium Relationships and Some

New Research 633

Conclusion 636

Questions and Problems 636

Bibliography 637

Chapter 25 The Arbitrage Pricing Model APT— A Multifactor Approach to Explaining Asset Prices 641

APT—What Is It? 641

Estimating and Testing APT 646

APT and CAPM 655

Recapitulation 658

Term Structure Factor 667

Credit Risk Factor 667

Foreign Exchange [Fx] Carry 668

Value Factor 668

Size Factor 668

Momentum Factor 668

Volatility Factor 669

Liquidity Factor 669

Inflation Factor 670

Gdp Factor 670

Equity Risk Premium 670

Limitations of Factor Investing 671

Factor Investing Summary 671

Conclusion 672

APPENDIX A A Simple Example of

Factor Analysis 672

APPENDIX B Specification of the APT with an Unobserved Market Factor 673

Questions and Problems 675

Bibliography 677

Chapter 26 Evaluation of Portfolio Performance 684

Evaluation Techniques 684

A Manipulation-Proof Performance Measure 693

Timing 694

Holding Measures of Timing 698

Multi-Index Models and Performance Measurement 699

Using Holdings Data to Measure Performance Directly 702

Time-Varying Betas 703

Conditional Models of Performance Measurement, Bayesian Analysis, and Stochastic Discount Factors 703

Bayesian Analysis 704

Stochastic Discount Factors 704

What’s a Researcher to Do? 704

Measuring the Performance of Active Bond Funds 705

The Performance of Actively Managed Mutual Funds 705

How Have Mutual Funds Done? 706

The Persistence of Performance 707

Persistence 707

APPENDIX The Use of APT Models to Evaluate and Diagnose Performance 712

Questions and Problems 716

Bibliography 716

Chapter 27 Portfolio Management Revisited 723

Managing Stock Portfolios 723

Active Management 727

Passive Vs. Active 728

International Diversification 728

Bond Management 729

Bond and Stock Investment with a Liability Stream 731

Bibliography 736

Description

About the Author

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