Cover -- Title Page -- Copyright -- Contents -- Preface -- Chapter 1 Introduction -- 1.1 The Portfolio Management Process -- 1.2 The Security Analyst's Job -- 1.3 Portfolio Analysis -- 1.3.1 Basic Assumptions -- 1.3.2 Reconsidering the Assumptions -- 1.4 Portfolio Selection -- 1.5 The Mathematics is Segregated -- 1.6 Topics to be Discussed -- Appendix: Various Rates of Return -- A1.1 Calculating the Holding Period Return -- A1.2 After-Tax Returns -- A1.3 Discrete and Continuously Compounded Returns -- Part 1 Probability Foundations -- Chapter 2 Assessing Risk -- 2.1 Mathematical Expectation -- 2.2 What Is Risk? -- 2.3 Expected Return -- 2.4 Risk of a Security -- 2.5 Covariance of Returns -- 2.6 Correlation of Returns -- 2.7 Using Historical Returns -- 2.8 Data Input Requirements -- 2.9 Portfolio Weights -- 2.10 A Portfolio's Expected Return -- 2.11 Portfolio Risk -- 2.12 Summary of Notations and Formulas -- Chapter 3 Risk and Diversification -- 3.1 Reconsidering Risk -- 3.1.1 Symmetric Probability Distributions -- 3.1.2 Fundamental Security Analysis -- 3.2 Utility Theory -- 3.2.1 Numerical Example -- 3.2.2 Indifference Curves -- 3.3 Risk-Return Space -- 3.4 Diversification -- 3.4.1 Diversification Illustrated -- 3.4.2 Risky A + Risky B = Riskless Portfolio -- 3.4.3 Graphical Analysis -- 3.5 Conclusions -- Part 2 Utility Foundations -- Chapter 4 Single-Period Utility Analysis -- 4.1 Basic Utility Axioms -- 4.2 The Utility of Wealth Function -- 4.3 Utility of Wealth and Returns -- 4.4 Expected Utility of Returns -- 4.5 Risk Attitudes -- 4.5.1 Risk Aversion -- 4.5.2 Risk-Loving Behavior -- 4.5.3 Risk-Neutral Behavior -- 4.6 Absolute Risk Aversion -- 4.7 Relative Risk Aversion -- 4.8 Measuring Risk Aversion -- 4.8.1 Assumptions -- 4.8.2 Power, Logarithmic, and Quadratic Utility.

4.8.3 Isoelastic Utility Functions -- 4.8.4 Myopic, but Optimal -- 4.9 Portfolio Analysis -- 4.9.1 Quadratic Utility Functions -- 4.9.2 Using Quadratic Approximations to Delineate Max[E(Utility)] Portfolios -- 4.9.3 Normally Distributed Returns -- 4.10 Indifference Curves -- 4.10.1 Selecting Investments -- 4.10.2 Risk-Aversion Measures -- 4.11 Summary and Conclusions -- Appendix: Risk Aversion and Indifference Curves -- A4.1 Absolute Risk Aversion (ARA) -- A4.2 Relative Risk Aversion (RRA) -- A4.3 Expected Utility of Wealth -- A4.4 Slopes of Indifference Curves -- A4.5 Indifference Curves for Quadratic Utility -- Part 3 Mean-Variance Portfolio Analysis -- Chapter 5 Graphical Portfolio Analysis -- 5.1 Delineating Efficient Portfolios -- 5.2 Portfolio Analysis Inputs -- 5.3 Two-Asset Isomean Lines -- 5.4 Two-Asset Isovariance Ellipses -- 5.5 Three-Asset Portfolio Analysis -- 5.5.1 Solving for One Variable Implicitly -- 5.5.2 Isomean Lines -- 5.5.3 Isovariance Ellipses -- 5.5.4 The Critical Line -- 5.5.5 Inefficient Portfolios -- 5.6 Legitimate Portfolios -- 5.7 ``Unusual'' Graphical Solutions Don't Exist -- 5.8 Representing Constraints Graphically -- 5.9 The Interior Decorator Fallacy -- 5.10 Summary -- Appendix: Quadratic Equations -- A5.1 Quadratic Equations -- A5.2 Analysis of Quadratics in Two Unknowns -- A5.3 Analysis of Quadratics in One Unknown -- A5.4 Solving an Ellipse -- A5.5 Solving for Lines Tangent to a Set of Ellipses -- Chapter 6 Efficient Portfolios -- 6.1 Risk and Return for Two-Asset Portfolios -- 6.2 The Opportunity Set -- 6.2.1 The Two-Security Case -- 6.2.2 Minimizing Risk in the Two-Security Case -- 6.2.3 The Three-Security Case -- 6.2.4 The n-Security Case -- 6.3 Markowitz Diversification -- 6.4 Efficient Frontier without the Risk-Free Asset -- 6.5 Introducing a Risk-Free Asset.

6.6 Summary and Conclusions -- Appendix: Equations for a Relationship between E(rp) and óp -- Chapter 7 Advanced Mathematical Portfolio Analysis -- 7.1 Efficient Portfolios without a Risk-Free Asset -- 7.1.1 A General Formulation -- 7.1.2 Formulating with Concise Matrix Notation -- 7.1.3 The Two-Fund Separation Theorem -- 7.1.4 Caveat about Negative Weights -- 7.2 Efficient Portfolios with a Risk-Free Asset -- 7.3 Identifying the Tangency Portfolio -- 7.4 Summary and Conclusions -- Appendix: Mathematical Derivation of the Efficient Frontier -- A7.1 No Risk-Free Asset -- A7.2 With a Risk-Free Asset -- Chapter 8 Index Models and Return-Generating Process -- 8.1 Single-Index Models -- 8.1.1 Return-Generating Functions -- 8.1.2 Estimating the Parameters -- 8.1.3 The Single-Index Model Using Excess Returns -- 8.1.4 The Riskless Rate Can Fluctuate -- 8.1.5 Diversification -- 8.1.6 About the Single-Index Model -- 8.2 Efficient Frontier and the Single-Index Model -- 8.3 Two-Index Models -- 8.3.1 Generating Inputs -- 8.3.2 Diversification -- 8.4 Multi-Index Models -- 8.5 Conclusions -- Appendix: Index Models -- A8.1 Solving for Efficient Portfolios with the Single-Index Model -- A8.2 Variance Decomposition -- A8.3 Orthogonalizing Multiple Indexes -- Part 4 Non-Mean-Variance Portfolios -- Chapter 9 Non-Normal Distributions of Returns -- 9.1 Stable Paretian Distributions -- 9.2 The Student's t-Distribution -- 9.3 Mixtures of Normal Distributions -- 9.3.1 Discrete Mixtures of Normal Distributions -- 9.3.2 Sequential Mixtures of Normal Distributions -- 9.4 Poisson Jump-Diffusion Process -- 9.5 Lognormal Distributions -- 9.5.1 Specifications of Lognormal Distributions -- 9.5.2 Portfolio Analysis under Lognormality -- 9.6 Conclusions -- Chapter 10 Non-Mean-Variance Investment Decisions.

10.1 Geometric Mean Return Criterion -- 10.1.1 Maximizing the Terminal Wealth -- 10.1.2 Log Utility and the GMR Criterion -- 10.1.3 Diversification and the GMR -- 10.2 The Safety-First Criterion -- 10.2.1 Roy's Safety-First Criterion -- 10.2.2 Kataoka's Safety-First Criterion -- 10.2.3 Telser's Safety-First Criterion -- 10.3 Semivariance Analysis -- 10.3.1 Definition of Semivariance -- 10.3.2 Utility Theory -- 10.3.3 Portfolio Analysis with the Semivariance -- 10.3.4 Capital Market Theory with the Semivariance -- 10.3.5 Summary about Semivariance -- 10.4 Stochastic Dominance Criterion -- 10.4.1 First-Order Stochastic Dominance -- 10.4.2 Second-Order Stochastic Dominance -- 10.4.3 Third-Order Stochastic Dominance -- 10.4.4 Summary of Stochastic Dominance Criterion -- 10.5 Mean-Variance-Skewness Analysis -- 10.5.1 Only Two Moments Can Be Inadequate -- 10.5.2 Portfolio Analysis in Three Moments -- 10.5.3 Efficient Frontier in Three-Dimensional Space -- 10.5.4 Undiversifiable Risk and Undiversifiable Skewness -- 10.6 Summary and Conclusions -- Appendix A: Stochastic Dominance -- A10.1 Proof for First-Order Stochastic Dominance -- A10.2 Proof That FA(r) ≤ FB(r) Is Equivalent to EA(r) ≥ EB(r) for Positive r -- A10.3 Proof for Second-Order Stochastic Dominance -- A10.4 Proof for Third-Order Stochastic Dominance -- Appendix B: Expected Utility as a Function of Three Moments -- Chapter 11 Risk Management: Value at Risk -- 11.1 VaR of a Single Asset -- 11.2 Portfolio VaR -- 11.3 Decomposition of a Portfolio's VaR -- 11.3.1 Marginal VaR -- 11.3.2 Incremental VaR -- 11.3.3 Component VaR -- 11.4 Other VaRs -- 11.4.1 Modified VaR (MVaR) -- 11.4.2 Conditional VaR (CVaR) -- 11.5 Methods of Measuring VaR -- 11.5.1 Variance-Covariance (Delta-Normal) Method -- 11.5.2 Historical Simulation Method.

11.5.3 Monte Carlo Simulation Method -- 11.6 Estimation of Volatilities -- 11.6.1 Unconditional Variance -- 11.6.2 Simple Moving Average -- 11.6.3 Exponentially Weighted Moving Average -- 11.6.4 GARCH-Based Volatility -- 11.6.5 Volatility Measures Using Price Range -- 11.6.6 Implied Volatility -- 11.7 The Accuracy of VaR Models -- 11.7.1 Back-Testing -- 11.7.2 Stress Testing -- 11.8 Summary and Conclusions -- Appendix: The Delta-Gamma Method -- Part 5 Asset Pricing Models -- Chapter 12 The Capital Asset Pricing Model -- 12.1 Underlying Assumptions -- 12.2 The Capital Market Line -- 12.2.1 The Market Portfolio -- 12.2.2 The Separation Theorem -- 12.2.3 Efficient Frontier Equation -- 12.2.4 Portfolio Selection -- 12.3 The Capital Asset Pricing Model -- 12.3.1 Background -- 12.3.2 Derivation of the CAPM -- 12.4 Over- and Under-priced Securities -- 12.5 The Market Model and the CAPM -- 12.6 Summary and Conclusions -- Appendix: Derivations of the CAPM -- A12.1 Other Approaches -- A12.2 Tangency Portfolio Research -- Chapter 13 Extensions of the Standard CAPM -- 13.1 Risk-Free Borrowing or Lending -- 13.1.1 The Zero-Beta Portfolio -- 13.1.2 No Risk-Free Borrowing -- 13.1.3 Lending and Borrowing Rates Can Differ -- 13.2 Homogeneous Expectations -- 13.2.1 Investment Horizons -- 13.2.2 Multivariate Distribution of Returns -- 13.3 Perfect Markets -- 13.3.1 Taxes -- 13.3.2 Transaction Costs -- 13.3.3 Indivisibilities -- 13.3.4 Price Competition -- 13.4 Unmarketable Assets -- 13.5 Summary and Conclusions -- Appendix: Derivations of a Non-Standard CAPM -- A13.1 The Characteristics of the Zero-Beta Portfolio -- A13.2 Derivation of Brennan's After-Tax CAPM -- A13.3 Derivation of Mayers's CAPM for Nonmarketable Assets -- Chapter 14 Empirical Tests of the CAPM -- 14.1 Time-Series Tests of the CAPM.

14.2 Cross-Sectional Tests of the CAPM.