投資學英文完整教學課件

投資學英文完整教學課件Chapter1TheInvestmentEnvironment1-3RealAssetsVersusFinancialAssetsRealAssetsDeterminetheproductivecapacityandnetincomeoftheeconomyExamples:Land,buildings,machines,knowledgeusedtoproducegoodsandservicesFinancialAssetsClaimsonrealassets1-4FinancialAssetsThreetypes:Fixedincomeordebt CommonstockorequityDerivativesecurities1-5FixedIncomePaymentsfixedordeterminedbyaformulaMoneymarketdebt:shortterm,highlymarketable,usuallylowcreditriskCapitalmarketdebt:longtermbonds,canbesafeorrisky1-6CommonStockandDerivativesCommonStockisequityorownershipinacorporation.Paymentstostockholdersarenotfixed,butdependonthesuccessofthefirmDerivativesValuederivesfrompricesofothersecurities,suchasstocksandbondsUsedtotransferrisk1-7FinancialMarketsandtheEconomyInformationRole:CapitalflowstocompanieswithbestprospectsConsumptionTiming:Usesecuritiestostorewealthandtransferconsumptiontothefuture1-8FinancialMarketsandthe

Economy(Ctd.)AllocationofRisk:InvestorscanselectsecuritiesconsistentwiththeirtastesforriskSeparationofOwnershipandManagement:Withstabilitycomesagencyproblems1-9FinancialMarketsandthe

Economy(Ctd.)CorporateGovernanceandCorporateEthicsAccountingScandalsExamples–Enron,RiteAid,HealthSouthAuditors–watchdogsofthefirmsAnalystScandalsArthurAndersenSarbanes-OxleyActTightentherulesofcorporategovernance

1-10TheInvestmentProcessAssetallocationChoiceamongbroadassetclassesSecurityselectionChoiceofwhichsecuritiestoholdwithinassetclassSecurityanalysistovaluesecuritiesanddetermineinvestmentattractiveness1-11MarketsareCompetitiveRisk-ReturnTrade-OffEfficientMarketsActiveManagementFindingmispricedsecuritiesTimingthemarket1-12MarketsareCompetitive(Ctd.)PassiveManagementNoattempttofindundervaluedsecuritiesNoattempttotimethemarketHoldingahighlydiversifiedportfolio1-13ThePlayersBusinessFirms–netborrowersHouseholds–netsaversGovernments–canbebothborrowersandsavers

1-14ThePlayers(Ctd.)FinancialIntermediaries:PoolandinvestfundsInvestmentCompaniesBanksInsurancecompaniesCreditunions1-15UniversalBankActivitiesInvestmentBankingUnderwritenewstockandbondissuesSellnewlyissuedsecuritiestopublicintheprimarymarketInvestorstradepreviouslyissuedsecuritiesamongthemselvesinthesecondarymarketsCommercialBankingTakedepositsandmakeloans1-16FinancialCrisisof2008AntecedentsoftheCrisis:“TheGreatModeration”:atimeinwhichtheU.S.hadastableeconomywithlowinterestratesandatamebusinesscyclewithonlymildrecessionsHistoricboominhousingmarket1-17Figure1.3TheCase-ShillerIndexofU.S.HousingPrices1-18ChangesinHousingFinanceOldWayLocalthriftinstitutionmademortgageloanstohomeownersThrift’smajorasset:aportfoliooflong-termmortgageloansThrift’smainliability:deposits“Originatetohold”NewWaySecuritization:FannieMaeandFreddieMacboughtmortgageloansandbundledthemintolargepoolsMortgage-backedsecuritiesaretradableclaimsagainsttheunderlyingmortgagepool“Originatetodistribute”1-19Figure1.4CashFlowsinaMortgagePass-ThroughSecurity1-20ChangesinHousingFinance

(Ctd.)Atfirst,FannieMaeandFreddieMacsecuritizedconformingmortgages,whichwerelowerriskandproperlydocumented.Later,privatefirmsbegansecuritizingnonconforming“subprime”

loans

withhigher

defaultrisk.LittleduediligencePlacedhigherdefaultriskoninvestorsGreateruseofARMsand“piggyback”loans1-21MortgageDerivativesCollateralizeddebtobligations(CDOs)MortgagepooldividedintoslicesortranchestoconcentratedefaultriskSeniortranches:Lowerrisk,highestratingJuniortranches:Highrisk,loworjunkrating1-22MortgageDerivativesProblem:Ratingswerewrong!Riskwasmuchhigherthananticipated,evenfortheseniortranches1-23WhywasCreditRiskUnderestimated?NooneexpectedtheentirehousingmarkettocollapseallatonceGeographicdiversificationdidnotreduceriskasmuchasanticipatedAgencyproblemswithratingagenciesCreditDefaultSwaps(CDS)didnotreduceriskasanticipated1-24CreditDefaultSwap(CDS)ACDSisaninsurancecontractagainstthedefaultoftheborrowerInvestorsboughtsub-primeloansandusedCDStoinsuretheirsafety1-25CreditDefaultSwap(CDS)SomebigswapissuersdidnothaveenoughcapitaltobacktheirCDSwhenthemarketcollapsed.Consequence:CDOinsurancefailed1-26RiseofSystemicRiskSystemicRisk:apotentialbreakdownofthefinancialsysteminwhichproblemsinonemarketspilloveranddisruptothers.OnedefaultmaysetoffachainoffurtherdefaultsWavesofsellingmayoccurinadownwardspiralasassetpricesdropPotentialcontagionfrominstitutiontoinstitution,andfrommarkettomarket1-27RiseofSystemic

Risk(Ctd.)Bankshadamismatchbetweenthematurityandliquidityoftheirassetsandliabilities.LiabilitieswereshortandliquidAssetswerelongandilliquidConstantneedtorefinancetheassetportfolioBankswereveryhighlylevered,givingthemalmostnomarginofsafety.1-28RiseofSystemicRisk(Ctd.)Investorsreliedtoomuchon“creditenhancement”throughstructuredproductslikeCDSCDStradedmostly“overthecounter”,solesstransparent,nopostedmarginrequirementsOpaquelinkagesbetweenfinancialinstrumentsandinstitutions1-29TheShoeDrops2000-2006:Sharpincreaseinhousingpricescausedmanyinvestorstobelievethatcontinuallyrisinghomepriceswouldbailoutpoorlyperformingloans2004:Interestratesbeganrising2006:Homepricespeaked1-30TheShoeDrops2007:Housingdefaultsandlossesonmortgage-backedsecuritiessurged2007:BearStearnsannouncestroubleatitssubprimemortgage–relatedhedgefunds1-31TheShoeDrops2008:TroubledfirmsincludeBearStearns,FannieMae,FreddieMac,MerrillLynch,LehmanBrothers,andAIGMoneymarketbreaksdownCreditmarketsfreezeupFederalbailouttostabilizefinancialsystem1-32SystemicRiskandtheRealEconomyAddliquiditytoreduceinsolvencyriskandbreakaviciouscircleofvaluationrisk/counterpartyrisk/liquidityriskIncreasetransparencyofstructuredproductslikeCDScontractsChangeincentivestodiscourageexcessiverisk-takingandtoreduceagencyproblemsatratingagenciesCHAPTER2AssetClassesandFinancialInstruments2-34AssetClassesMoneymarketinstrumentsCapitalmarketinstrumentsBondsEquitySecuritiesDerivativeSecurities2-35TheMoneyMarketSubsectorofthefixed-incomemarket:Securitiesareshort-term,liquid,lowrisk,andoftenhavelargedenominationsMoneymarketmutualfundsallowindividualstoaccessthemoneymarket.2-36Table2.1MajorComponentsof

theMoneyMarket2-37MoneyMarketSecuritiesTreasurybills:Short-termdebtofU.S.governmentBidandaskedpriceBankdiscountmethodCertificatesofDeposit:TimedepositwithabankCommercialPaper:Short-term,unsecureddebtofacompany2-38MoneyMarketSecuritiesBankers’Acceptances:Anordertoabankbyabank’scustomertopayasumofmoneyonafuturedateEurodollars:dollar-denominatedtimedepositsinbanksoutsidetheU.S.ReposandReverses:Short-termloanbackedbygovernmentsecurities.FedFunds:Veryshort-termloansbetweenbanks2-39YieldsonMoneyMarketInstrumentsExceptforTreasurybills,moneymarketsecuritiesarenotfreeofdefaultriskBoththepremiumonbankCDsandtheTEDspreadhaveoftenbecomegreaterduringperiodsoffinancialcrisisDuringthecreditcrisisof2008,thefederalgovernmentofferedinsurancetomoneymarketmutualfundsaftersomefundsexperiencedlosses2-40TheBondMarketTreasuryNotesandBondsInflation-ProtectedTreasuryBondsFederalAgencyDebtInternationalBonds2-41TheBondMarketMunicipalBondsCorporateBondsMortgagesandMortgage-BackedSecurities2-42TreasuryNotesandBondsMaturitiesNotes–maturitiesupto10yearsBonds–maturitiesfrom10to30yearsParValue-$1,000InterestpaidsemiannuallyQuotes–percentageofpar2-43TheBondMarketInflation-ProtectedTreasuryBondsTIPS:ProvideinflationprotectionFederalAgencyDebtDebtofmortgage-relatedagenciessuchasFannieMaeandFreddieMacInternationalBondsEurobondsandYankeebonds2-44MunicipalBondsIssuedbystateandlocalgovernmentsInterestisexemptfromfederalincometaxandsometimesfromstateandlocaltax2-45MunicipalBondsTypesGeneralobligationbonds:BackedbytaxingpowerofissuerRevenuebonds:backedbyproject’srevenuesorbythemunicipalagencyoperatingtheproject.2-46Figure2.4Tax-exemptDebtOutstanding2-47MunicipalBondYieldsTochoosebetweentaxableandtax-exemptbonds,compareafter-taxreturnsoneachbond.Lettequaltheinvestor’smarginaltaxbracketLetrequalthebefore-taxreturnonthetaxablebondandrm

denotethemunicipalbondrate.Ifr(1-t)>rm

thenthetaxablebondgivesahigherreturn;otherwise,themunicipalbondispreferred.2-48Table2.2Tax-ExemptYieldTableTheequivalenttaxableyieldissimplythetax-freerate,rm,dividedby(1-t).2-49CorporateBondsIssuedbyprivatefirmsSemi-annualinterestpaymentsSubjecttolargerdefaultriskthangovernmentsecuritiesOptionsincorporatebondsCallableConvertible2-50ProportionalownershipofamortgagepooloraspecifiedobligationsecuredbyapoolProducedbysecuritizingmortgagesMortgage-backedsecuritiesarecalledpass-throughsbecausethecashflowsproducedbyhomeownerspayingofftheirmortgagesarepassedthroughtoinvestors.Mortgage-BackedSecurities2-51Mortgage-BackedSecuritiesMostmortgage-backedsecuritieswereissuedbyFannieMaeandFreddieMac.Traditionally,pass-throughswerecomprisedofconformingmortgages,whichmetstandardsofcreditworthiness.2-52Mortgage-BackedSecuritiesEventually,“Private-label”issuerssecuritizedlargeamountsofsubprimemortgages,madetofinanciallyweakborrowers.Finally,FannieandFreddiewereallowedandevenencouragedtobuysubprimemortgagepools.September,2008:FannieandFreddiegottakenoverbythefederalgovernment.2-53Figure2.6Mortgage-backedsecuritiesoutstanding2-54EquitySecuritiesCommonstock:OwnershipResidualclaimLimitedliabilityPreferredstock:PerpetuityFixeddividendsPriorityovercommonTaxtreatmentAmericanDepositoryReceipts2-55StockMarketIndexesDowJonesIndustrialAverageIncludes30largeblue-chipcorporationsComputedsince1896Price-weightedaverage2-56Example2.2Price-WeightedAveragePortfolio:Initialvalue$25+$100=$125 Finalvalue$30+$90=$120Percentagechangeinportfoliovalue=5/125=-.04=-4%Index:Initialindexvalue(25+100)/2=62.5 Finalindexvalue(30+90)/2=60 Percentagechangeinindex-2.5/62.5=-.04=-4%2-57S&P500Broadlybasedindexof500firmsMarket-value-weightedindexInvestorscanbasetheirportfoliosonanindex:BuyanindexmutualfundBuyexchangetradedfunds(ETFs)Standard&Poor’sIndexes2-58OtherIndexesU.S.IndexesNYSECompositeNASDAQCompositeWilshire5000ForeignIndexesNikkei(Japan)FTSE(U.K.;pronounced“footsie”)DAX(Germany),HangSeng(HongKong)TSX(Canada)2-59DerivativesMarketsOptionsandfuturesprovidepayoffsthatdependonthevaluesofotherassetssuchascommodityprices,bondandstockprices,ormarketindexvalues.Aderivativeisasecuritythatgetsitsvaluefromthevaluesofanotherasset.2-60OptionsCall:Righttobuyunderlyingassetatthestrikeorexerciseprice.ValueofcallsdecreaseasstrikepriceincreasesPut:Righttosellunderlyingassetatthestrikeorexerciseprice.ValueofputsincreasewithstrikepriceValueofbothcallsandputsincreasewithtimeuntilexpiration.2-61FuturesContractsAfuturescontractcalls

fordeliveryofanasset(orinsomecases,itscashvalue)ataspecifieddeliveryormaturitydateforanagreed-uponprice,calledthefuturesprice,tobepaidatcontractmaturity.Longposition:TakedeliveryatmaturityShortposition:Makedeliveryatmaturity2-62ComparisonOptionRight,butnotobligation,tobuyorsell;optionisexercisedonlywhenitisprofitableOptionsmustbepurchasedThepremiumisthepriceoftheoptionitself.FuturesContractObligedtomakeortakedelivery.Longpositionmustbuyatthefuturesprice,shortpositionmustsellatfuturespriceFuturescontractsareenteredintowithoutcostCHAPTER3HowSecuritiesareTraded3-64HowFirmsIssueSecuritiesPrimaryMarketFirmsissuenewsecuritiesthroughunderwritertopublicInvestorsgetnewsecurities;firmgetsfundingSecondaryMarketInvestorstradepreviouslyissuedsecuritiesamongthemselves3-65HowFirmsIssueSecurities(Ctd.)StocksIPOSeasonedofferingBondsPublicofferingPrivateplacement3-66

InvestmentBanking

Underwriting:InvestmentbankhelpsthefirmtoissueandmarketnewsecuritiesProspectus:Describestheissueandtheprospectsofthecompany.Redherring3-67Figure3.1RelationshipAmongaFirmIssuingSecurities,theUnderwriters,andthePublic3-68InvestmentBankingFirmcommitmentinvestmentbankpurchasessecuritiesfromtheissuingcompanyandthenresellsthemtothepublic.ShelfRegistrationSECRule415:Allowsfirmstoregistersecuritiesandgraduallysellthemtothepublicfortwoyears3-69InvestmentBanking(Ctd.)PrivateplacementsFirmusesunderwritertosellsecuritiestoasmallgroupofinstitutionalorwealthyinvestors.CheaperthanpublicofferingsPrivateplacementsnottradedinsecondarymarkets3-70InitialPublicOfferingsProcessRoadshowstopublicizenewofferingBookbuildingtodeterminedemandforthenewissueDegreeofinvestorinterestinthenewofferingprovidesvaluablepricinginformation3-71Figure3.3Long-termRelativePerformanceofInitialPublicOfferings3-72HowSecuritiesareTradedTypesofMarkets:DirectsearchBuyersandsellersseekeachotherBrokeredmarketsBrokerssearchoutbuyersandsellers3-73HowSecuritiesareTradedTypesofMarkets:DealermarketsDealershaveinventoriesofassetsfromwhichtheybuyandsellAuctionmarketstradersconvergeatoneplacetotrade3-74BidandAskedPricesBidPriceBidsareofferstobuy.Indealermarkets,thebidpriceisthepriceatwhichthedealeriswillingtobuy.Investors“selltothebid”.Bid-Askedspreadistheprofitformakingamarketinasecurity.AskPriceAskedpricesrepresentofferstosell.Indealermarkets,theaskedpriceisthepriceatwhichthedealeriswillingtosell.Investorsmustpaytheaskedpricetobuythesecurity.3-75TypesofOrdersMarketOrder:ExecutedimmediatelyTraderreceivescurrentmarketpricePrice-contingentOrder:TradersspecifybuyingorsellingpriceAlargeordermaybefilledatmultipleprices3-76Figure3.5Price-ContingentOrders3-77TradingMechanismsDealermarketsElectroniccommunicationnetworks(ECNs)TruetradingsystemsthatcanautomaticallyexecuteordersSpecialistsmarketsmaintaina“fairandorderlymarket”3-78NASDAQListsabout3,200firmsOriginally,NASDAQwasprimarilyadealermarketwithapricequotationsystemToday,NASDAQ’sMarketCenteroffersasophisticatedelectronictradingplatformwithautomatictradeexecution.Largeordersmaystillbenegotiatedthroughbrokersanddealers3-79Table3.1PartialRequirementsforListingonNASDAQMarkets3-80NewYorkStockExchangeListsabout2,800firmsAutomaticelectronictradingrunsside-by-sidewithtraditionalbroker/specialistsystemSuperDot:electronicorder-routingsystemDirectPlus:fullyautomatedexecutionforsmallordersSpecialists:Handlelargeordersandmaintainorderlytrading3-81Table3.2SomeInitialListingRequirementsfortheNYSE3-82ElectronicCommunicationNetworksECNs:PrivatecomputernetworksthatdirectlylinkbuyerswithsellersforautomatedorderexecutionMajorECNsincludeNASDAQ’sMarketCenter,ArcaEx,DirectEdge,BATS,andLavaFlow.“FlashTrading”:Computerprogramslookforeventhesmallestmispricingopportunityandexecutetradesintinyfractionsofasecond.3-83BondTradingMostbondtradingtakesplaceintheOTCmarketamongbonddealers.Marketformanybondissuesis“thin”.NYSEisexpandingitsbond-tradingsystem.NYSEBondsisthelargestcentralizedbondmarketofanyU.S.exchange3-84MarketStructureinOtherCountriesLondon-predominatelyelectronictradingEuronext–marketformedbycombinationoftheParis,AmsterdamandBrusselsexchanges,thenmergedwithNYSETokyoStockExchange3-85GlobalizationandConsolidationofStockMarkets

NYSEmergersandacquisitions:Archipelago(ECN)AmericanStockExchangeEuronextNASDAQmergersandacquisitions:Instinet/INET(ECN)BostonStockExchange3-86GlobalizationandConsolidationofStockMarkets

ChicagoMercantileExchangeacquired:ChicagoBoardofTradeNewYorkMercantileExchange3-87Figure3.6MarketCapitalizationofMajorWorldStockExchanges,20073-88TradingCostsBrokerageCommission:feepaidtobrokerformakingthetransactionExplicitcostoftradingFullServicevs.DiscountbrokerageSpread:DifferencebetweenthebidandaskedpricesImplicitcostoftrading3-89BuyingonMarginBorrowingpartofthetotalpurchasepriceofapositionusingaloanfromabroker.Investorcontributestheremainingportion.Marginreferstothepercentageoramountcontributedbytheinvestor.Youprofitwhenthestockappreciates.3-90BuyingonMargin(Ctd.)InitialmarginissetbytheFedCurrently50%MaintenancemarginMinimumequitythatmustbekeptinthemarginaccountMargincallifvalueofsecuritiesfallstoomuch3-91MarginTrading:

InitialConditionsExample3.1Shareprice $10060% InitialMargin40% MaintenanceMargin100 SharesPurchasedInitialPositionStock$10,000Borrowed$4,000Equity$6,0003-92MaintenanceMarginExample3.1Stockpricefallsto$70pershareNewPositionStock$7,000 Borrowed$4,000Equity$3,000Margin%=$3,000/$7,000=43%3-93MarginCallExample3.2Howfarcanthestockpricefallbeforea

margincall?Letmaintenancemargin=30%Equity=100P-$4000Percentagemargin=(100P-$4,000)

/100P(100P-$4,000)

/100P=0.30Solvetofind:P=$57.14

3-94Table3.4IllustrationofBuyingStock

onMargin3-95ShortSalesPurpose:toprofitfromadeclineinthepriceofastockorsecurityMechanicsBorrowstockthroughadealerSellitanddepositproceedsandmargininanaccountClosingouttheposition:buythestockandreturntothepartyfromwhichitwasborrowed3-96ShortSale:

InitialConditionsExample3.3DotBomb 1000Shares50% InitialMargin30% MaintenanceMargin$100 InitialPriceSaleProceeds $100,000Margin&Equity $50,000StockOwed 1000shares3-97Example3.3(Ctd.)

DotBombfallsto$70pershareAssets$100,000(saleproceeds) $50,000(initialmargin)Liabilities$70,000(buyshares)Equity$80,000Profit=endingequity–beginningequity=$80,000-$50,000=$30,000=declineinsharepricexnumberofsharessoldshort3-98ShortSale-MarginCallHowmuchcanthestockpricerisebeforeamargincall? ($150,000*-1000P)/(1000P)=30% P=$115.38*Initialmarginplussaleproceeds

3-99RegulationofSecuritiesMarketsMajorregulations:SecuritiesActof1933SecuritiesActof1934SecuritiesInvestorProtectionActof1970Self-RegulationFinancialIndustryRegulatoryAuthorityCFAInstitutestandardsofprofessionalconduct3-100RegulationofSecuritiesMarkets(Ctd.)Sarbanes-OxleyActPublicCompanyAccountingOversightBoardIndependentfinancialexpertstoserveonauditcommitteesofboardsofdirectorsCEOsandCFOspersonallycertifyfirms’financialreportsBoardsmusthaveindependentdirectors3-101InsiderTradingOfficers,directors,majorstockholdersmustreportalltransactionsinfirm’sstockInsidersdoexploittheirknowledgeJaffestudy:Insidebuyers>insidesellers=stockdoeswellInsidesellers>insidebuyers=stockdoespoorlyCHAPTER4MutualFundsandOtherInvestmentCompanies4-103InvestmentCompaniesPoolfundsofindividualinvestorsandinvestinawiderangeofsecuritiesorotherassets.Servicesprovided:Administration&recordkeepingDiversification&divisibilityProfessionalmanagementReducedtransactioncosts4-104NetAssetValueCalculation: MarketValueofAssets-Liabilities SharesOutstanding4-105TypesofInvestmentCompaniesUnitTrustsFixedportfolioofuniformassetsUnmanagedTotalassetshavedeclinedfrom$105billionin1990to$29billionin20094-106TypesofInvestmentCompaniesManagedInvestmentCompaniesOpen-EndFundissuesnewshareswheninvestorsbuyinandredeemsshareswheninvestorscashoutPricedatNetAssetValue(NAV)4-107TypesofInvestmentCompaniesManagedInvestmentCompaniesClosed-Endnochangeinsharesoutstanding;oldinvestorscashoutbysellingtonewinvestorsPricedatpremiumordiscounttoNAV4-108TypesofInvestmentCompaniesOtherinvestmentorganizationsCommingledfundsREITsHedgeFunds4-109MutualFunds:Open-EndInvestmentCompaniesMoneyMarketEquitySectorBondBalancedAssetAllocationandFlexibleIndexInternational4-110Table4.1U.S.MutualFundsbyInvestmentClassification1104-111HowFundsAreSoldDirect-marketedfundsSalesforcedistributedRevenuesharingonsalesforcedistributedPotentialconflictsofinterestFinancialSupermarkets4-112CostsofInvestinginMutualFundsFeeStructure:FourtypesOperatingexpensesFront-endloadBack-endload12b-1chargeFeesmustbedisclosedintheprospectusShareclasseswithdifferentfeecombinations4-113Example4.2:FeesforVariousClasses

(DreyfusWorldwideGrowthFund)4-114FeesandMutualFundReturns:

AnExampleInitialNAV=$20Incomedistributionsof$.15Capitalgaindistributionsof$.05EndingNAV=$20.10:4-115Table4.2ImpactsofCostsonInvestmentPerformance4-116LateTradingandMarketTimingLatetrading–acceptingbuyorsellordersafterthemarketclosesandNAVisdeterminedMarkettiming–rapidin-and-outtradingonstalenetassetvaluesNeteffectistotransfervaluefromordinaryshareholderstoprivilegedtradersMutualfundspenalizedforimpropertrading.Newrulestopreventthesepractices4-117TaxationofMutualFundIncomePass-throughstatusundertheU.S.taxcodeTaxesarepaidonlybytheinvestorFundinvestorsdonotcontrolthetimingofthesalesofsecuritiesfromtheportfolioHighportfolioturnoverleadstotaxinefficiencyAverageturnover=60%4-118ExchangeTradedFundsExamples:“spiders”,“diamonds”and“cubes”Potentialadvantages:TradecontinuouslylikestocksCanbesoldshortorpurchasedonmarginLowercostsTaxefficientPotentialdisadvantages:PricescandepartbysmallamountsfromNAVMustbepurchasedfromabroker4-119Figure4.2GrowthofU.S.ETFsovertime4-120Table4.3ETFSponsorsandProducts4-121MutualFundInvestmentPerformance:

AFirstLookPerformanceofactivelymanagedfunds:belowthereturnontheWilshireindexin23ofthe39yearsfrom1971to2009Evidenceforpersistentsuperiorperformance(duetoskillandnotjustgoodluck)isweak,butsuggestiveBadperformancemorelikelytopersist4-122Figure4.3DiversifiedEquityFundsversusWilshire5000Index4-123Table4.4Consistencyof

InvestmentResults4-124InformationonMutualFundsFund’sprospectusdescribes:investmentobjectivesFundinvestmentadviserandportfoliomanagerFeesandcostsStatementofAdditionalInformation(SAI)Fund’sannualreport4-125InformationonMutualFundsWiesenberger’sInvestmentCompaniesMorningstar()Yahoo(/funds)InvestmentCompanyInstitute()DirectoryofMutualFundsCHAPTER5IntroductiontoRisk,Return,andtheHistoricalRecordInterestRateDeterminantsSupplyHouseholdsDemandBusinessesGovernment’sNetSupplyand/orDemandFederalReserveActionsRealandNominalRatesofInterestNominalinterestrate:GrowthrateofyourmoneyRealinterestrate:GrowthrateofyourpurchasingpowerLetR=nominalrate,r=realrateandI=inflationrate.Then:EquilibriumRealRateofInterestDeterminedby:SupplyDemandGovernmentactionsExpectedrateofinflationFigure5.1DeterminationoftheEquilibriumRealRateofInterestEquilibriumNominalRateofInterestAstheinflationrateincreases,investorswilldemandhighernominalratesofreturnIfE(i)denotescurrentexpectationsofinflation,thenwegettheFisherEquation:Nominalrate=realrate+inflationforecastTaxesandtheRealRateofInterestTaxliabilitiesarebasedonnominalincomeGivenataxrate(t)andnominalinterestrate(R),theRealafter-taxrateis:Theafter-taxrealrateofreturnfallsastheinflationraterises.RatesofReturnforDifferentHoldingPeriodsZeroCouponBond,Par=$100,T=maturity,P=price,rf(T)=totalriskfreereturnExample5.2AnnualizedRatesofReturnEquation5.7EAREARdefinition:percentageincreaseinfundsinvestedovera1-yearhorizonEquation5.8APRAPR:annualizingusingsimpleinterestTable5.1APRvs.EARTable5.2StatisticsforT-BillRates,InflationRatesandRealRates,1926-2009BillsandInflation,1926-2009Moderateinflationcanoffsetmostofthenominalgainsonlow-riskinvestments.AdollarinvestedinT-billsfrom1926–2009grewto$20.52,butwitharealvalueofonly$1.69.Negativecorrelationbetweenrealrateandinflationratemeansthenominalraterespondslessthan1:1tochangesinexpectedinflation.Figure5.3InterestRatesandInflation,1926-2009RiskandRiskPremiumsHPR=HoldingPeriodReturnP0=BeginningpriceP1=EndingpriceD1=DividendduringperiodoneRatesofReturn:SinglePeriodEndingPrice= 110BeginningPrice= 100Dividend= 4HPR=(110-100+4)/(100)=14%RatesofReturn:SinglePeriodExampleExpectedreturnsp(s)=probabilityofastater(s)=returnifastateoccurss=stateExpectedReturnandStandardDeviationState

Prob.ofState rinState