Preface

Over the past 30 years, the investment industry has seen stock market and real estate bubbles, interest rates approaching zero, the emergence of hedge funds and private equity companies, the globalization of financial markets, the proliferation of derivative securities, and the growth of securitized assets and structured financing. Mirroring these events has been the academic contributions to the investment discipline: the development of capital market theories, the derivation of option pricing models, and the explorations into efficient market theories. The financial events and the academic contributions together point out the challenges in mastering an understanding and developing a knowledge of investments and financial markets.

Today, managing securities in this dynamic and innovative investment environment is a challenge. In this increasingly complex environment, many practitioners manage their securities and portfolios using a Bloomberg terminal. Bloomberg is a computer information and retrieval system providing access to financial and economic data, news, and analytics. Bloomberg terminals are common on most trading floors and are becoming more common in universities where they are used for research, teaching, and managing student investment funds.

The purpose of this text is to provide professionals and finance students with an exposition on equity investments and financial markets that will take them from the basic concepts, strategies, and fundamentals to a more detailed understanding of the markets, advanced strategies, and models. Given the widespread use of the Bloomberg system, this text also includes detailed descriptions of the Bloomberg system, a listing of many of the analytical functions that can be applied to investment analysis, and detailed explanations of how Bloomberg information and analytical functions can be applied to the investment topics covered in the text. It is my hope that the synthesis of fundamental and advanced topics with Bloomberg information and analytics will provide professionals and students of finance with not only a better foundation in understanding the complexities and subtleties of the financial markets, but also with the ability to apply that understanding to real-world investment decisions—to grasp how “it is done on the street.”

This book is the second in a three-part series. The first, Debt Markets and Analysis, covered fixed-income securities. This book, in turn, focuses on stock and stock portfolios. The third covers derivatives. Like the debt markets book, this book covers subjects presented in many investment texts: equity markets, how stocks are traded, investment funds, return and risk, portfolio theory, capital market theory, fundamental analysis, technical analysis, efficient markets, and equity derivatives. Different from other investment texts is the integration of Bloomberg into the presentation. For those readers who have access to a Bloomberg terminal, it is my hope that they will be able to use the Bloomberg information and the end-of-the-chapter exercises in this book to develop the practical skills needed to apply traditional investment concepts to the real world. It is also my hope that the integration of Bloomberg with investment concepts and theories enhances the readers' intellectual depth and understanding of finance. Finance and economics professors frequently require that students explain a theory, strategy, or idea mathematically, graphically, and intuitively. By so doing, students' depth of understanding, as well as retention, of the theory and idea is often enhanced. It has been my experience in using Bloomberg in my classes that it too enhances a student's depth and knowledge of finance.

Depth of understanding is also accomplished by mastering seminal works. Whether it is Keynesian economic theory, a work of Shakespeare, Einstein's theory of relativity, or the philosophy of Descartes, a student who studies such intellectual works inevitably learns how great minds work, the subtleties inherent in great ideas, the power of logic, and the beauty of thoughts and ideas. The finance and economics disciplines are replete with great thinkers. Like other investment books, this book presents many of the seminal works in financial economics, including the works of Nobel Laureates such as Tobin, Modigliani, Miller, Markowitz, Sharpe, Scholes, Merton, Fama, Hansen, and Shiller.

Furthermore, I strongly believe that intellectual depth is achieved when students are able to relate theory to the real world. In writing about the differences between science and the humanities, the novelist Tom Robbins wrote that “the scientist needs the humanist to keep the scientist human, and the humanist needs the scientist to keep the humanist honest.” Over the years, I have found that my finance students need to see more than an abstract concept, a statistic, or a dollar sign; they also need to be able to connect the idea to what is real. The growth in America's gross domestic product from $3 trillion in 1984 to over $16 trillion today, or the Dow Jones Average increase from 700 in 1982 to over 16,000 today, I tell my students, can also be explained as an economy that has evolved into one that can take an office building filled with information and put it on a small computer chip, as one in which planes can take off every minute from any major urban airport and go anywhere in the world, and as one in which data and information can be accessed in seconds via satellites and through the Internet. Again, students of finance who can access information from Bloomberg will be better able to connect the ideas and theories of finance to their practical applications.

The book is written for finance professors interested in incorporating Bloomberg as part of their class instructions, as well as facilitating their own research. The book can also be used as an MBA, MS, and undergraduate finance text. With the emphasis just on equity and equity derivatives, the book is tailored for departments with curricula requiring separate investments-type classes for equity and fixed-income. As an equity market text, the book is designed for a one-semester investment course. The Bloomberg material is presented in boxes in each chapter, and Chapter 2 provides an overview and guide to the Bloomberg system. Finally, the book is written for professionals in the investment industry involved in stock and stock portfolio management. For professionals, the text can be used as an instructional source and as a guide on how to apply Bloomberg to equity markets and analysis, as well as a review of fundamental investment concepts and theories.

Content

The book is comprehensive, covering equity securities and markets, the major theories and models, the practical applications of the models, and cases and empirical studies. Chapter 1 presents an overview of the investment environment, examining the nature of financial assets, the types of securities that exist, the nature and types of markets that securities give rise to, and the general characteristics of assets. Chapter 2 presents an overview and guide to the Bloomberg system. Chapter 3 looks at how equity and debt instruments are valued and how their rates of return are measured. This is followed by two chapters that examine the equity markets, securities, and funds. In Chapter 4, equity securities and their markets are examined in terms of the rules, participants, and forces that govern them; in Chapter 5, investment funds and intermediary securities are examined.

Chapters 6--10 cover expected return and risk, portfolio analysis, and capital market theory: Chapter 6 examines the expected return and risk for stock; Chapter 7 looks at the return and risk of a portfolio of stocks; Chapter 8 examines the Markowitz portfolio selection model; Chapters 9 and 10 present Capital Market Theory—the Capital Asset Pricing Model and the Arbitrage Pricing Theory. Chapters 11--15 examine the fundamental valuation of stocks, technical analysis, and the efficient market hypothesis. Chapter 11 examines the financial anatomy of company and the factors that determine equity value; Chapter 12 looks at empirical approaches to stock valuation and selection; Chapter 13 examines fundamental valuation of the overall market and industry and the top-down approach to stock evaluation. In Chapter 14, technical analysis and behavioral finance are described, and in Chapter 15, the efficient market hypothesis is examined in terms of the theory and its empirical tests. Finally, the last two chapters cover equity derivatives: Chapters 16 provides an overview of the markets, uses, and pricing of stock and stock index options, and Chapter 17 examines the markets, uses, and pricing of futures and futures options.

The text stresses concepts, model construction, numerical examples, and Bloomberg applications and information sources. The text also includes Bloomberg exercises at the end of each of the chapters. These exercises are designed for practitioners who have access to such terminals at their jobs, for professors and students who have access to Bloomberg terminals at their universities, and for students who have access to Bloomberg either at their university or possibly through internships they may have at financial companies. As I noted previously, it is my hope that the Bloomberg exercises will add depth to the understanding of investments, as well as an appreciation of the breadth of financial information and analytics provided by the Bloomberg system. Instructors are invited to visit www.wiley.com for additional materials, such as appendices explaining different Bloomberg applications in more...