{"product_id":"modern-portfolio-theory-website-foundations-analysis-and-new-developments-hardback-9781118370520","title":"Modern Portfolio Theory, + Website; Foundations, Analysis, and New Developments (Hardback) 9781118370520","description":"\u003cfont face=\"Georgia\"\u003e\r\n\u003cp\u003e\u003cfont size=\"6\"\u003eModern Portfolio Theory, + Website\u003c\/font\u003e\u003cbr\u003e\r\n\u003cfont size=\"5\"\u003eFoundations, Analysis, and New Developments\u003c\/font\u003e\u003c\/p\u003e\r\n\r\n\u003cp\u003e\u003cem\u003e\u003cp\u003eFrancis and Kim review the works of a generation of financial economists and pull these together under a single set of mathematical conventions. Their writing style is easy-to-read and the chapters flow logically. The early chapters deal with the original material created by Markowitz, Tobin, and Sharpe whereas succeeding chapters deal with more recent developments. Readers who wish to avoid complex derivations and proofs may do so easily because the book is organized so this rigorous material is in the end-of-chapter appendices and footnotes. This work is comprehensive and accessible, and will reward either classroom or individual study. —\u003cb\u003eHarry Markowitz, Nobel Laureate, Professor of Economics and Finance\u003c\/b\u003e\u003c\/p\u003e\u003c\/em\u003e\u003c\/p\u003e\r\n\r\n\r\n\u003cp\u003e\u003cfont size=\"4\"\u003eJack Clark Francis (Author), Dongcheol Kim (Author)\u003c\/font\u003e\u003c\/p\u003e\r\n\r\n\u003cp\u003e\u003cfont size=\"3\"\u003e9781118370520, Wiley\u003c\/font\u003e\u003c\/p\u003e\r\n\r\n\u003cp\u003e\u003cfont size=\"3\"\u003eHardback, published 15 February 2013\u003c\/font\u003e\u003c\/p\u003e\r\n\r\n\u003cp\u003e\u003cfont size=\"3\"\u003e576 pages\u003cbr\u003e25.6 x 17.3 x 4.6 cm, 1.066 kg\u003c\/font\u003e\u003c\/p\u003e\r\n\r\n\r\n\r\n\r\n\r\n\u003cp align=\"justify\"\u003e\u003cstrong\u003e\u003cfont size=\"3\"\u003e\u003cb\u003eA through guide covering Modern Portfolio Theory as well as the recent developments surrounding it\u003c\/b\u003e  \u003cp\u003eModern portfolio theory (MPT), which originated with Harry Markowitz's seminal paper \"Portfolio Selection\" in 1952, has stood the test of time and continues to be the intellectual foundation for real-world portfolio management. This book presents a comprehensive picture of MPT in a manner that can be effectively used by financial practitioners and understood by students.\u003c\/p\u003e \u003cp\u003e\u003ci\u003eModern Portfolio Theory\u003c\/i\u003e provides a summary of the important findings from all of the financial research done since MPT was created and presents all the MPT formulas and models using one consistent set of mathematical symbols. Opening with an informative introduction to the concepts of probability and utility theory, it quickly moves on to discuss Markowitz's seminal work on the topic with a thorough explanation of the underlying mathematics.\u003c\/p\u003e \u003cul\u003e \u003cli\u003eAnalyzes portfolios of all sizes and types, shows how the advanced findings and formulas are derived, and offers a concise and comprehensive review of MPT literature\u003c\/li\u003e \u003cli\u003eAddresses logical extensions to Markowitz's work, including the Capital Asset Pricing Model, Arbitrage Pricing Theory, portfolio ranking models, and performance attribution\u003c\/li\u003e \u003cli\u003eConsiders stock market developments like decimalization, high frequency trading, and algorithmic trading, and reveals how they align with MPT\u003c\/li\u003e \u003cli\u003eCompanion Website contains Excel spreadsheets that allow you to compute and graph Markowitz efficient frontiers with riskless and risky assets\u003c\/li\u003e \u003c\/ul\u003e \u003cp\u003eIf you want to gain a complete understanding of modern portfolio theory this is the book you need to read.\u003c\/p\u003e\u003c\/font\u003e\u003c\/strong\u003e\u003c\/p\u003e\r\n\r\n\u003cp\u003e\u003cfont size=\"3\"\u003e\u003cp\u003ePreface xvii\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 1 Introduction 1\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e1.1 The Portfolio Management Process 1\u003c\/p\u003e \u003cp\u003e1.2 The Security Analyst’s Job 1\u003c\/p\u003e \u003cp\u003e1.3 Portfolio Analysis 2\u003c\/p\u003e \u003cp\u003e1.3.1 Basic Assumptions 3\u003c\/p\u003e \u003cp\u003e1.3.2 Reconsidering the Assumptions 3\u003c\/p\u003e \u003cp\u003e1.4 Portfolio Selection 5\u003c\/p\u003e \u003cp\u003e1.5 The Mathematics is Segregated 6\u003c\/p\u003e \u003cp\u003e1.6 Topics to be Discussed 6\u003c\/p\u003e \u003cp\u003eAppendix: Various Rates of Return 7\u003c\/p\u003e \u003cp\u003eA1.1 Calculating the Holding Period Return 7\u003c\/p\u003e \u003cp\u003eA1.2 After-Tax Returns 8\u003c\/p\u003e \u003cp\u003eA1.3 Discrete and Continuously Compounded Returns 8\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePART ONE Probability Foundations\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 2 Assessing Risk 13\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e2.1 Mathematical Expectation 13\u003c\/p\u003e \u003cp\u003e2.2 What Is Risk? 15\u003c\/p\u003e \u003cp\u003e2.3 Expected Return 16\u003c\/p\u003e \u003cp\u003e2.4 Risk of a Security 17\u003c\/p\u003e \u003cp\u003e2.5 Covariance of Returns 18\u003c\/p\u003e \u003cp\u003e2.6 Correlation of Returns 19\u003c\/p\u003e \u003cp\u003e2.7 Using Historical Returns 20\u003c\/p\u003e \u003cp\u003e2.8 Data Input Requirements 22\u003c\/p\u003e \u003cp\u003e2.9 Portfolio Weights 22\u003c\/p\u003e \u003cp\u003e2.10 A Portfolio’s Expected Return 23\u003c\/p\u003e \u003cp\u003e2.11 Portfolio Risk 23\u003c\/p\u003e \u003cp\u003e2.12 Summary of Notations and Formulas 27\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 3 Risk and Diversification 29\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e3.1 Reconsidering Risk 29\u003c\/p\u003e \u003cp\u003e3.1.1 Symmetric Probability Distributions 31\u003c\/p\u003e \u003cp\u003e3.1.2 Fundamental Security Analysis 32\u003c\/p\u003e \u003cp\u003e3.2 Utility Theory 32\u003c\/p\u003e \u003cp\u003e3.2.1 Numerical Example 33\u003c\/p\u003e \u003cp\u003e3.2.2 Indifference Curves 35\u003c\/p\u003e \u003cp\u003e3.3 Risk-Return Space 36\u003c\/p\u003e \u003cp\u003e3.4 Diversification 38\u003c\/p\u003e \u003cp\u003e3.4.1 Diversification Illustrated 38\u003c\/p\u003e \u003cp\u003e3.4.2 Risky A + Risky B = Riskless Portfolio 39\u003c\/p\u003e \u003cp\u003e3.4.3 Graphical Analysis 40\u003c\/p\u003e \u003cp\u003e3.5 Conclusions 41\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePART TWO Utility Foundations\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 4 Single-Period Utility Analysis 45\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e4.1 Basic Utility Axioms 46\u003c\/p\u003e \u003cp\u003e4.2 The Utility of Wealth Function 47\u003c\/p\u003e \u003cp\u003e4.3 Utility of Wealth and Returns 47\u003c\/p\u003e \u003cp\u003e4.4 Expected Utility of Returns 48\u003c\/p\u003e \u003cp\u003e4.5 Risk Attitudes 52\u003c\/p\u003e \u003cp\u003e4.5.1 Risk Aversion 52\u003c\/p\u003e \u003cp\u003e4.5.2 Risk-Loving Behavior 56\u003c\/p\u003e \u003cp\u003e4.5.3 Risk-Neutral Behavior 57\u003c\/p\u003e \u003cp\u003e4.6 Absolute Risk Aversion 59\u003c\/p\u003e \u003cp\u003e4.7 Relative Risk Aversion 60\u003c\/p\u003e \u003cp\u003e4.8 Measuring Risk Aversion 62\u003c\/p\u003e \u003cp\u003e4.8.1 Assumptions 62\u003c\/p\u003e \u003cp\u003e4.8.2 Power, Logarithmic, and Quadratic Utility 62\u003c\/p\u003e \u003cp\u003e4.8.3 Isoelastic Utility Functions 64\u003c\/p\u003e \u003cp\u003e4.8.4 Myopic, but Optimal 65\u003c\/p\u003e \u003cp\u003e4.9 Portfolio Analysis 66\u003c\/p\u003e \u003cp\u003e4.9.1 Quadratic Utility Functions 67\u003c\/p\u003e \u003cp\u003e4.9.2 Using Quadratic Approximations to Delineate Max[E(Utility)] Portfolios 68\u003c\/p\u003e \u003cp\u003e4.9.3 Normally Distributed Returns 69\u003c\/p\u003e \u003cp\u003e4.10 Indifference Curves 69\u003c\/p\u003e \u003cp\u003e4.10.1 Selecting Investments 71\u003c\/p\u003e \u003cp\u003e4.10.2 Risk-Aversion Measures 73\u003c\/p\u003e \u003cp\u003e4.11 Summary and Conclusions 74\u003c\/p\u003e \u003cp\u003eAppendix: Risk Aversion and Indifference Curves 75\u003c\/p\u003e \u003cp\u003eA4.1 Absolute Risk Aversion (ARA) 75\u003c\/p\u003e \u003cp\u003eA4.2 Relative Risk Aversion (RRA) 76\u003c\/p\u003e \u003cp\u003eA4.3 Expected Utility of Wealth 77\u003c\/p\u003e \u003cp\u003eA4.4 Slopes of Indifference Curves 77\u003c\/p\u003e \u003cp\u003eA4.5 Indifference Curves for Quadratic Utility 79\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePART THREE Mean-Variance Portfolio Analysis\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 5 Graphical Portfolio Analysis 85\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e5.1 Delineating Efficient Portfolios 85\u003c\/p\u003e \u003cp\u003e5.2 Portfolio Analysis Inputs 86\u003c\/p\u003e \u003cp\u003e5.3 Two-Asset Isomean Lines 87\u003c\/p\u003e \u003cp\u003e5.4 Two-Asset Isovariance Ellipses 90\u003c\/p\u003e \u003cp\u003e5.5 Three-Asset Portfolio Analysis 92\u003c\/p\u003e \u003cp\u003e5.5.1 Solving for One Variable Implicitly 93\u003c\/p\u003e \u003cp\u003e5.5.2 Isomean Lines 96\u003c\/p\u003e \u003cp\u003e5.5.3 Isovariance Ellipses 97\u003c\/p\u003e \u003cp\u003e5.5.4 The Critical Line 99\u003c\/p\u003e \u003cp\u003e5.5.5 Inefficient Portfolios 101\u003c\/p\u003e \u003cp\u003e5.6 Legitimate Portfolios 102\u003c\/p\u003e \u003cp\u003e5.7 ‘‘Unusual’’ Graphical Solutions Don’t Exist 103\u003c\/p\u003e \u003cp\u003e5.8 Representing Constraints Graphically 103\u003c\/p\u003e \u003cp\u003e5.9 The Interior Decorator Fallacy 103\u003c\/p\u003e \u003cp\u003e5.10 Summary 104\u003c\/p\u003e \u003cp\u003eAppendix: Quadratic Equations 105\u003c\/p\u003e \u003cp\u003eA5.1 Quadratic Equations 105\u003c\/p\u003e \u003cp\u003eA5.2 Analysis of Quadratics in Two Unknowns 106\u003c\/p\u003e \u003cp\u003eA5.3 Analysis of Quadratics in One Unknown 107\u003c\/p\u003e \u003cp\u003eA5.4 Solving an Ellipse 108\u003c\/p\u003e \u003cp\u003eA5.5 Solving for Lines Tangent to a Set of Ellipses 110\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 6 Efficient Portfolios 113\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e6.1 Risk and Return for Two-Asset Portfolios 113\u003c\/p\u003e \u003cp\u003e6.2 The Opportunity Set 114\u003c\/p\u003e \u003cp\u003e6.2.1 The Two-Security Case 114\u003c\/p\u003e \u003cp\u003e6.2.2 Minimizing Risk in the Two-Security Case 116\u003c\/p\u003e \u003cp\u003e6.2.3 The Three-Security Case 117\u003c\/p\u003e \u003cp\u003e6.2.4 The n-Security Case 119\u003c\/p\u003e \u003cp\u003e6.3 Markowitz Diversification 120\u003c\/p\u003e \u003cp\u003e6.4 Efficient Frontier without the Risk-Free Asset 123\u003c\/p\u003e \u003cp\u003e6.5 Introducing a Risk-Free Asset 126\u003c\/p\u003e \u003cp\u003e6.6 Summary and Conclusions 131\u003c\/p\u003e \u003cp\u003eAppendix: Equations for a Relationship between\u003ci\u003e E(r\u003csub\u003ep\u003c\/sub\u003e)\u003c\/i\u003e and \u003ci\u003eσ\u003csub\u003ep\u003c\/sub\u003e\u003c\/i\u003e 131\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 7 Advanced Mathematical Portfolio Analysis 135\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e7.1 Efficient Portfolios without a Risk-Free Asset 135\u003c\/p\u003e \u003cp\u003e7.1.1 A General Formulation 135\u003c\/p\u003e \u003cp\u003e7.1.2 Formulating with Concise Matrix Notation 140\u003c\/p\u003e \u003cp\u003e7.1.3 The Two-Fund Separation Theorem 145\u003c\/p\u003e \u003cp\u003e7.1.4 Caveat about Negative Weights 146\u003c\/p\u003e \u003cp\u003e7.2 Efficient Portfolios with a Risk-Free Asset 146\u003c\/p\u003e \u003cp\u003e7.3 Identifying the Tangency Portfolio 150\u003c\/p\u003e \u003cp\u003e7.4 Summary and Conclusions 152\u003c\/p\u003e \u003cp\u003eAppendix: Mathematical Derivation of the Efficient Frontier 152\u003c\/p\u003e \u003cp\u003eA7.1 No Risk-Free Asset 152\u003c\/p\u003e \u003cp\u003eA7.2 With a Risk-Free Asset 156\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 8 Index Models and Return-Generating Process 165\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e8.1 Single-Index Models 165\u003c\/p\u003e \u003cp\u003e8.1.1 Return-Generating Functions 165\u003c\/p\u003e \u003cp\u003e8.1.2 Estimating the Parameters 168\u003c\/p\u003e \u003cp\u003e8.1.3 The Single-Index Model Using Excess Returns 171\u003c\/p\u003e \u003cp\u003e8.1.4 The Riskless Rate Can Fluctuate 173\u003c\/p\u003e \u003cp\u003e8.1.5 Diversification 176\u003c\/p\u003e \u003cp\u003e8.1.6 About the Single-Index Model 177\u003c\/p\u003e \u003cp\u003e8.2 Efficient Frontier and the Single-Index Model 178\u003c\/p\u003e \u003cp\u003e8.3 Two-Index Models 186\u003c\/p\u003e \u003cp\u003e8.3.1 Generating Inputs 187\u003c\/p\u003e \u003cp\u003e8.3.2 Diversification 188\u003c\/p\u003e \u003cp\u003e8.4 Multi-Index Models 189\u003c\/p\u003e \u003cp\u003e8.5 Conclusions 190\u003c\/p\u003e \u003cp\u003eAppendix: Index Models 191\u003c\/p\u003e \u003cp\u003eA8.1 Solving for Efficient Portfolios with the Single-Index Model 191\u003c\/p\u003e \u003cp\u003eA8.2 Variance Decomposition 196\u003c\/p\u003e \u003cp\u003eA8.3 Orthogonalizing Multiple Indexes 196\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePART FOUR Non-Mean-Variance Portfolios\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 9 Non-Normal Distributions of Returns 201\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e9.1 Stable Paretian Distributions 201\u003c\/p\u003e \u003cp\u003e9.2 The Student’s t-Distribution 204\u003c\/p\u003e \u003cp\u003e9.3 Mixtures of Normal Distributions 204\u003c\/p\u003e \u003cp\u003e9.3.1 Discrete Mixtures of Normal Distributions 204\u003c\/p\u003e \u003cp\u003e9.3.2 Sequential Mixtures of Normal Distributions 205\u003c\/p\u003e \u003cp\u003e9.4 Poisson Jump-Diffusion Process 206\u003c\/p\u003e \u003cp\u003e9.5 Lognormal Distributions 206\u003c\/p\u003e \u003cp\u003e9.5.1 Specifications of Lognormal Distributions 207\u003c\/p\u003e \u003cp\u003e9.5.2 Portfolio Analysis under Lognormality 208\u003c\/p\u003e \u003cp\u003e9.6 Conclusions 213\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 10 Non-Mean-Variance Investment Decisions 215\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e10.1 Geometric Mean Return Criterion 215\u003c\/p\u003e \u003cp\u003e10.1.1 Maximizing the Terminal Wealth 216\u003c\/p\u003e \u003cp\u003e10.1.2 Log Utility and the GMR Criterion 216\u003c\/p\u003e \u003cp\u003e10.1.3 Diversification and the GMR 217\u003c\/p\u003e \u003cp\u003e10.2 The Safety-First Criterion 218\u003c\/p\u003e \u003cp\u003e10.2.1 Roy’s Safety-First Criterion 218\u003c\/p\u003e \u003cp\u003e10.2.2 Kataoka’s Safety-First Criterion 222\u003c\/p\u003e \u003cp\u003e10.2.3 Telser’s Safety-First Criterion 225\u003c\/p\u003e \u003cp\u003e10.3 Semivariance Analysis 228\u003c\/p\u003e \u003cp\u003e10.3.1 Definition of Semivariance 228\u003c\/p\u003e \u003cp\u003e10.3.2 Utility Theory 230\u003c\/p\u003e \u003cp\u003e10.3.3 Portfolio Analysis with the Semivariance 231\u003c\/p\u003e \u003cp\u003e10.3.4 Capital Market Theory with the Semivariance 234\u003c\/p\u003e \u003cp\u003e10.3.5 Summary about Semivariance 236\u003c\/p\u003e \u003cp\u003e10.4 Stochastic Dominance Criterion 236\u003c\/p\u003e \u003cp\u003e10.4.1 First-Order Stochastic Dominance 236\u003c\/p\u003e \u003cp\u003e10.4.2 Second-Order Stochastic Dominance 241\u003c\/p\u003e \u003cp\u003e10.4.3 Third-Order Stochastic Dominance 244\u003c\/p\u003e \u003cp\u003e10.4.4 Summary of Stochastic Dominance Criterion 245\u003c\/p\u003e \u003cp\u003e10.5 Mean-Variance-Skewness Analysis 246\u003c\/p\u003e \u003cp\u003e10.5.1 Only Two Moments Can Be Inadequate 246\u003c\/p\u003e \u003cp\u003e10.5.2 Portfolio Analysis in Three Moments 247\u003c\/p\u003e \u003cp\u003e10.5.3 Efficient Frontier in Three-Dimensional Space 249\u003c\/p\u003e \u003cp\u003e10.5.4 Undiversifiable Risk and Undiversifiable Skewness 252\u003c\/p\u003e \u003cp\u003e10.6 Summary and Conclusions 254\u003c\/p\u003e \u003cp\u003eAppendix A: Stochastic Dominance 254\u003c\/p\u003e \u003cp\u003eA10.1 Proof for First-Order Stochastic Dominance 254\u003c\/p\u003e \u003cp\u003eA10.2 Proof That \u003ci\u003eF\u003csub\u003eA\u003c\/sub\u003e(r) ≤ F\u003csub\u003eB\u003c\/sub\u003e(r)\u003c\/i\u003e Is Equivalent to \u003ci\u003eE\u003csub\u003eA\u003c\/sub\u003e(r) ≥ E\u003csub\u003eB\u003c\/sub\u003e(r)\u003c\/i\u003e for Positive \u003ci\u003er\u003c\/i\u003e 255\u003c\/p\u003e \u003cp\u003eAppendix B: Expected Utility as a Function of Three Moments 257\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 11 Risk Management: Value at Risk 261\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e11.1 VaR of a Single Asset 261\u003c\/p\u003e \u003cp\u003e11.2 Portfolio VaR 263\u003c\/p\u003e \u003cp\u003e11.3 Decomposition of a Portfolio’s VaR 265\u003c\/p\u003e \u003cp\u003e11.3.1 Marginal VaR 265\u003c\/p\u003e \u003cp\u003e11.3.2 Incremental VaR 266\u003c\/p\u003e \u003cp\u003e11.3.3 Component VaR 267\u003c\/p\u003e \u003cp\u003e11.4 Other VaRs 269\u003c\/p\u003e \u003cp\u003e11.4.1 Modified VaR (MVaR) 269\u003c\/p\u003e \u003cp\u003e11.4.2 Conditional VaR (CVaR) 270\u003c\/p\u003e \u003cp\u003e11.5 Methods of Measuring VaR 270\u003c\/p\u003e \u003cp\u003e11.5.1 Variance-Covariance (Delta-Normal) Method 270\u003c\/p\u003e \u003cp\u003e11.5.2 Historical Simulation Method 274\u003c\/p\u003e \u003cp\u003e11.5.3 Monte Carlo Simulation Method 276\u003c\/p\u003e \u003cp\u003e11.6 Estimation of Volatilities 277\u003c\/p\u003e \u003cp\u003e11.6.1 Unconditional Variance 277\u003c\/p\u003e \u003cp\u003e11.6.2 Simple Moving Average 277\u003c\/p\u003e \u003cp\u003e11.6.3 Exponentially Weighted Moving Average 278\u003c\/p\u003e \u003cp\u003e11.6.4 GARCH-Based Volatility 278\u003c\/p\u003e \u003cp\u003e11.6.5 Volatility Measures Using Price Range 279\u003c\/p\u003e \u003cp\u003e11.6.6 Implied Volatility 281\u003c\/p\u003e \u003cp\u003e11.7 The Accuracy of VaR Models 282\u003c\/p\u003e \u003cp\u003e11.7.1 Back-Testing 283\u003c\/p\u003e \u003cp\u003e11.7.2 Stress Testing 284\u003c\/p\u003e \u003cp\u003e11.8 Summary and Conclusions 285\u003c\/p\u003e \u003cp\u003eAppendix: The Delta-Gamma Method 285\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePART FIVE Asset Pricing Models\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 12 The Capital Asset Pricing Model 291\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e12.1 Underlying Assumptions 291\u003c\/p\u003e \u003cp\u003e12.2 The Capital Market Line 292\u003c\/p\u003e \u003cp\u003e12.2.1 The Market Portfolio 292\u003c\/p\u003e \u003cp\u003e12.2.2 The Separation Theorem 293\u003c\/p\u003e \u003cp\u003e12.2.3 Efficient Frontier Equation 294\u003c\/p\u003e \u003cp\u003e12.2.4 Portfolio Selection 294\u003c\/p\u003e \u003cp\u003e12.3 The Capital Asset Pricing Model 295\u003c\/p\u003e \u003cp\u003e12.3.1 Background 295\u003c\/p\u003e \u003cp\u003e12.3.2 Derivation of the CAPM 296\u003c\/p\u003e \u003cp\u003e12.4 Over- and Under-priced Securities 299\u003c\/p\u003e \u003cp\u003e12.5 The Market Model and the CAPM 300\u003c\/p\u003e \u003cp\u003e12.6 Summary and Conclusions 301\u003c\/p\u003e \u003cp\u003eAppendix: Derivations of the CAPM 301\u003c\/p\u003e \u003cp\u003eA12.1 Other Approaches 301\u003c\/p\u003e \u003cp\u003eA12.2 Tangency Portfolio Research 305\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 13 Extensions of the Standard CAPM 311\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e13.1 Risk-Free Borrowing or Lending 311\u003c\/p\u003e \u003cp\u003e13.1.1 The Zero-Beta Portfolio 311\u003c\/p\u003e \u003cp\u003e13.1.2 No Risk-Free Borrowing 314\u003c\/p\u003e \u003cp\u003e13.1.3 Lending and Borrowing Rates Can Differ 314\u003c\/p\u003e \u003cp\u003e13.2 Homogeneous Expectations 316\u003c\/p\u003e \u003cp\u003e13.2.1 Investment Horizons 316\u003c\/p\u003e \u003cp\u003e13.2.2 Multivariate Distribution of Returns 317\u003c\/p\u003e \u003cp\u003e13.3 Perfect Markets 318\u003c\/p\u003e \u003cp\u003e13.3.1 Taxes 318\u003c\/p\u003e \u003cp\u003e13.3.2 Transaction Costs 320\u003c\/p\u003e \u003cp\u003e13.3.3 Indivisibilities 321\u003c\/p\u003e \u003cp\u003e13.3.4 Price Competition 321\u003c\/p\u003e \u003cp\u003e13.4 Unmarketable Assets 322\u003c\/p\u003e \u003cp\u003e13.5 Summary and Conclusions 323\u003c\/p\u003e \u003cp\u003eAppendix: Derivations of a Non-Standard CAPM 324\u003c\/p\u003e \u003cp\u003eA13.1 The Characteristics of the Zero-Beta Portfolio 324\u003c\/p\u003e \u003cp\u003eA13.2 Derivation of Brennan’s After-Tax CAPM 325\u003c\/p\u003e \u003cp\u003eA13.3 Derivation of Mayers’s CAPM for Nonmarketable Assets 328\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 14 Empirical Tests of the CAPM 333\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e14.1 Time-Series Tests of the CAPM 333\u003c\/p\u003e \u003cp\u003e14.2 Cross-Sectional Tests of the CAPM 335\u003c\/p\u003e \u003cp\u003e14.2.1 Black, Jensen, and Scholes’s (1972) Tests 336\u003c\/p\u003e \u003cp\u003e14.2.2 Fama and MacBeth’s (1973) Tests 340\u003c\/p\u003e \u003cp\u003e14.2.3 Fama and French’s (1992) Tests 344\u003c\/p\u003e \u003cp\u003e14.3 Empirical Misspecifications in Cross-Sectional Regression Tests 345\u003c\/p\u003e \u003cp\u003e14.3.1 The Errors-in-Variables Problem 346\u003c\/p\u003e \u003cp\u003e14.3.2 Sensitivity of Beta to the Return Measurement Intervals 351\u003c\/p\u003e \u003cp\u003e14.4 Multivariate Tests 353\u003c\/p\u003e \u003cp\u003e14.4.1 Gibbons’s (1982) Test 353\u003c\/p\u003e \u003cp\u003e14.4.2 Stambaugh’s (1982) Test 355\u003c\/p\u003e \u003cp\u003e14.4.3 Jobson and Korkie’s (1982) Test 355\u003c\/p\u003e \u003cp\u003e14.4.4 Shanken’s (1985) Test 356\u003c\/p\u003e \u003cp\u003e14.4.5 Generalized Method of Moment (GMM) Tests 356\u003c\/p\u003e \u003cp\u003e14.5 Is the CAPM Testable? 356\u003c\/p\u003e \u003cp\u003e14.6 Summary and Conclusions 357\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 15 Continuous-Time Asset Pricing Models 361\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e15.1 Intertemporal CAPM (ICAPM) 361\u003c\/p\u003e \u003cp\u003e15.2 The Consumption-Based CAPM (CCAPM) 363\u003c\/p\u003e \u003cp\u003e15.2.1 Derivation 363\u003c\/p\u003e \u003cp\u003e15.2.2 The Consumption-Based CAPM with a Power Utility Function 365\u003c\/p\u003e \u003cp\u003e15.3 Conclusions 366\u003c\/p\u003e \u003cp\u003eAppendix: Lognormality and the Consumption-Based CAPM 367\u003c\/p\u003e \u003cp\u003eA15.1 Lognormality 367\u003c\/p\u003e \u003cp\u003eA15.2 The Consumption-Based CAPM with Lognormality 367\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 16 Arbitrage Pricing Theory 371\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e16.1 Arbitrage Concepts 371\u003c\/p\u003e \u003cp\u003e16.2 Index Arbitrage 375\u003c\/p\u003e \u003cp\u003e16.2.1 Basic Ideas of Index Arbitrage 376\u003c\/p\u003e \u003cp\u003e16.2.2 Index Arbitrage and Program Trading 377\u003c\/p\u003e \u003cp\u003e16.2.3 Use of ETFs for Index Arbitrage 377\u003c\/p\u003e \u003cp\u003e16.3 The Asset Pricing Equation 378\u003c\/p\u003e \u003cp\u003e16.3.1 One Single Factor with No Residual Risk 379\u003c\/p\u003e \u003cp\u003e16.3.2 Two Factors with No Residual Risk 380\u003c\/p\u003e \u003cp\u003e16.3.3 K Factors with No Residual Risk 381\u003c\/p\u003e \u003cp\u003e16.3.4 K Factors with Residual Risk 382\u003c\/p\u003e \u003cp\u003e16.4 Asset Pricing on a Security Market Plane 383\u003c\/p\u003e \u003cp\u003e16.5 Contrasting APT with CAPM 385\u003c\/p\u003e \u003cp\u003e16.6 Empirical Evidence 386\u003c\/p\u003e \u003cp\u003e16.7 Comparing the APT and CAPM Empirically 388\u003c\/p\u003e \u003cp\u003e16.8 Conclusions 389\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePART SIX Implementing the Theory\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 17 Portfolio Construction and Selection 395\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e17.1 Efficient Markets 395\u003c\/p\u003e \u003cp\u003e17.1.1 Fama’s Classifications 395\u003c\/p\u003e \u003cp\u003e17.1.2 Formal Models 396\u003c\/p\u003e \u003cp\u003e17.2 Using Portfolio Theories to Construct and Select Portfolios 398\u003c\/p\u003e \u003cp\u003e17.3 Security Analysis 400\u003c\/p\u003e \u003cp\u003e17.4 Market Timing 401\u003c\/p\u003e \u003cp\u003e17.4.1 Forecasting Beta 401\u003c\/p\u003e \u003cp\u003e17.4.2 Nonstationarity of Beta 404\u003c\/p\u003e \u003cp\u003e17.4.3 Determinants of Beta 406\u003c\/p\u003e \u003cp\u003e17.5 Diversification 407\u003c\/p\u003e \u003cp\u003e17.5.1 Simple Diversification 408\u003c\/p\u003e \u003cp\u003e17.5.2 Timing and Diversification 409\u003c\/p\u003e \u003cp\u003e17.5.3 International Diversification 411\u003c\/p\u003e \u003cp\u003e17.6 Constructing an Active Portfolio 415\u003c\/p\u003e \u003cp\u003e17.7 Portfolio Revision 424\u003c\/p\u003e \u003cp\u003e17.7.1 Portfolio Revision Costs 424\u003c\/p\u003e \u003cp\u003e17.7.2 Controlled Transition 426\u003c\/p\u003e \u003cp\u003e17.7.3 The Attainable Efficient Frontier 428\u003c\/p\u003e \u003cp\u003e17.7.4 A Turnover-Constrained Approach 428\u003c\/p\u003e \u003cp\u003e17.8 Summary and Conclusions 430\u003c\/p\u003e \u003cp\u003eAppendix: Proofs for Some Ratios from Active Portfolios 431\u003c\/p\u003e \u003cp\u003eA17.1 Proof for \u003ci\u003eα\u003c\/i\u003e\u003csub\u003eA\u003c\/sub\u003e\u003ci\u003e\/σ\u003c\/i\u003e\u003csup\u003e2\u003c\/sup\u003e\u003ci\u003e ε\u003c\/i\u003e\u003ci\u003e\u003csub\u003eA\u003c\/sub\u003e\u003c\/i\u003e= ∑\u003csup\u003eK\u003c\/sup\u003e\u003csub\u003ei\u003c\/sub\u003e\u003csub\u003e=\u003c\/sub\u003e\u003csub\u003e1\u003c\/sub\u003e(\u003ci\u003eα\u003c\/i\u003e\u003ci\u003ei\u003c\/i\u003e\u003ci\u003e\/σ\u003c\/i\u003e\u003csup\u003e2\u003c\/sup\u003e\u003ci\u003e ε\u003c\/i\u003e\u003ci\u003e\u003csub\u003ei\u003c\/sub\u003e\u003c\/i\u003e) 431\u003c\/p\u003e \u003cp\u003eA17.2 Proof for (\u003ci\u003eα\u003c\/i\u003e\u003csub\u003eA\u003c\/sub\u003e\u003ci\u003eβ\u003c\/i\u003e\u003ci\u003e\u003csub\u003eA\u003c\/sub\u003e\u003c\/i\u003e\u003ci\u003e\/ σ\u003c\/i\u003e\u003csup\u003e2\u003c\/sup\u003e\u003ci\u003e ε\u003c\/i\u003e\u003ci\u003e\u003csub\u003eA\u003c\/sub\u003e\u003c\/i\u003e) = ∑\u003csup\u003eK\u003c\/sup\u003e\u003csub\u003ei\u003c\/sub\u003e\u003csub\u003e=\u003c\/sub\u003e\u003csub\u003e1\u003c\/sub\u003e (\u003ci\u003eα\u003c\/i\u003e\u003ci\u003e\u003csub\u003ei\u003c\/sub\u003e\u003c\/i\u003e\u003ci\u003eβ\u003c\/i\u003e\u003ci\u003e\u003csub\u003ei\u003c\/sub\u003e\u003c\/i\u003e\u003ci\u003e\/σ\u003c\/i\u003e\u003csup\u003e2\u003c\/sup\u003e\u003ci\u003e ε\u003c\/i\u003e\u003ci\u003e\u003csub\u003ei\u003c\/sub\u003e\u003c\/i\u003e) 431\u003c\/p\u003e \u003cp\u003eA17.3 Proof for (\u003ci\u003eα\u003c\/i\u003e\u003csup\u003e2\u003c\/sup\u003e\u003ci\u003e\u003csub\u003eA\u003c\/sub\u003e\u003c\/i\u003e\u003ci\u003e\/ σ\u003c\/i\u003e\u003csup\u003e2\u003c\/sup\u003e\u003ci\u003e ε\u003c\/i\u003e\u003ci\u003e\u003csub\u003eA\u003c\/sub\u003e\u003c\/i\u003e) = ∑\u003csup\u003eK\u003c\/sup\u003e\u003csub\u003ei\u003c\/sub\u003e\u003csub\u003e=\u003c\/sub\u003e\u003csub\u003e1\u003c\/sub\u003e (\u003ci\u003eσ\u003c\/i\u003e\u003csup\u003e2\u003c\/sup\u003e\u003ci\u003e i\u003c\/i\u003e\u003ci\u003e\/σ\u003c\/i\u003e\u003csup\u003e2\u003c\/sup\u003e\u003ci\u003e ε\u003c\/i\u003e\u003ci\u003e\u003csub\u003ei\u003c\/sub\u003e\u003c\/i\u003e) 432\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 18 Portfolio Performance Evaluation 435\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e18.1 Mutual Fund Returns 435\u003c\/p\u003e \u003cp\u003e18.2 Portfolio Performance Analysis in the Good Old Days 436\u003c\/p\u003e \u003cp\u003e18.3 Capital Market Theory Assumptions 438\u003c\/p\u003e \u003cp\u003e18.4 Single-Parameter Portfolio Performance Measures 438\u003c\/p\u003e \u003cp\u003e18.4.1 Sharpe’s Reward-to-Variability Ratio 439\u003c\/p\u003e \u003cp\u003e18.4.2 Treynor’s Reward-to-Risk Ratio 441\u003c\/p\u003e \u003cp\u003e18.4.3 Jensen’s Measure 444\u003c\/p\u003e \u003cp\u003e18.4.4 Information Ratio (or Appraisal Ratio) 447\u003c\/p\u003e \u003cp\u003e18.4.5 M\u003csup\u003e2\u003c\/sup\u003e Measure 448\u003c\/p\u003e \u003cp\u003e18.5 Market Timing 449\u003c\/p\u003e \u003cp\u003e18.5.1 Interpreting the Market Timing Coefficient 450\u003c\/p\u003e \u003cp\u003e18.5.2 Henriksson and Merton’s Model 451\u003c\/p\u003e \u003cp\u003e18.5.3 Descriptive Comments 452\u003c\/p\u003e \u003cp\u003e18.6 Comparing Single-Parameter Portfolio Performance Measures 452\u003c\/p\u003e \u003cp\u003e18.6.1 Ranking Undiversified Investments 452\u003c\/p\u003e \u003cp\u003e18.6.2 Contrasting the Three Models 453\u003c\/p\u003e \u003cp\u003e18.6.3 Survivorship Bias 454\u003c\/p\u003e \u003cp\u003e18.7 The Index of Total Portfolio Risk (ITPR) and the Portfolio Beta 454\u003c\/p\u003e \u003cp\u003e18.8 Measurement Problems 457\u003c\/p\u003e \u003cp\u003e18.8.1 Measurement of the Market Portfolio’s Returns 458\u003c\/p\u003e \u003cp\u003e18.8.2 Nonstationarity of Portfolio Return Distributions 460\u003c\/p\u003e \u003cp\u003e18.9 Do Winners or Losers Repeat? 461\u003c\/p\u003e \u003cp\u003e18.10 Summary about Investment Performance Evaluation 465\u003c\/p\u003e \u003cp\u003eAppendix: Sharpe Ratio of an Active Portfolio 467\u003c\/p\u003e \u003cp\u003eA18.1 Proof that \u003ci\u003eS\u003csup\u003e2\u003c\/sup\u003e\u003csub\u003eq\u003c\/sub\u003e= S\u003csup\u003e2\u003c\/sup\u003e\u003csub\u003em\u003c\/sub\u003e+ [α\u003csub\u003eA\u003c\/sub\u003e\/σ (ε\u003csub\u003eA\u003c\/sub\u003e)]\u003csup\u003e2\u003c\/sup\u003e \u003c\/i\u003e467\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 19 Performance Attribution 473\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e19.1 Factor Model Analysis 474\u003c\/p\u003e \u003cp\u003e19.2 Return-Based Style Analysis 475\u003c\/p\u003e \u003cp\u003e19.3 Return Decomposition-Based Analysis 479\u003c\/p\u003e \u003cp\u003e19.4 Conclusions 485\u003c\/p\u003e \u003cp\u003e19.4.1 Detrimental Uses of Portfolio Performance Attribution 486\u003c\/p\u003e \u003cp\u003e19.4.2 Symbiotic Possibilities 486\u003c\/p\u003e \u003cp\u003eAppendix: Regression Coefficients Estimation with Constraints 486\u003c\/p\u003e \u003cp\u003eA19.1 With No Constraints 487\u003c\/p\u003e \u003cp\u003eA19.2 With the Constraint of \u003ci\u003e∑\u003csup\u003eK\u003c\/sup\u003e\u003csub\u003ek\u003c\/sub\u003e\u003csub\u003e=\u003c\/sub\u003e\u003csub\u003e1 \u003c\/sub\u003eβ\u003csub\u003eik \u003c\/sub\u003e475\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 20 Stock Market Developments 489\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e20.1 Recent NYSE Consolidations 489\u003c\/p\u003e \u003cp\u003e20.1.1 Archipelago 490\u003c\/p\u003e \u003cp\u003e20.1.2 Pacific Stock Exchange (PSE) 490\u003c\/p\u003e \u003cp\u003e20.1.3 ArcaEx 490\u003c\/p\u003e \u003cp\u003e20.1.4 New York Stock Exchange (NYSE) 490\u003c\/p\u003e \u003cp\u003e20.1.5 NYSE Group 491\u003c\/p\u003e \u003cp\u003e20.1.6 NYSE Diversifies Internationally 491\u003c\/p\u003e \u003cp\u003e20.1.7 NYSE Alliances 491\u003c\/p\u003e \u003cp\u003e20.2 International Securities Exchange (ISE) 492\u003c\/p\u003e \u003cp\u003e20.3 Nasdaq 492\u003c\/p\u003e \u003cp\u003e20.3.1 London Stock Exchange (LSE) 493\u003c\/p\u003e \u003cp\u003e20.3.2 OMX Group 493\u003c\/p\u003e \u003cp\u003e20.3.3 Bourse Dubai 493\u003c\/p\u003e \u003cp\u003e20.3.4 Boston Stock Exchange (BSE) 494\u003c\/p\u003e \u003cp\u003e20.3.5 Philadelphia Stock Exchange (PHLX) 494\u003c\/p\u003e \u003cp\u003e20.4 Downward Pressures on Transactions Costs 494\u003c\/p\u003e \u003cp\u003e20.4.1 A National Market System (NMS) 495\u003c\/p\u003e \u003cp\u003e20.4.2 The SEC’s Reg ATS 496\u003c\/p\u003e \u003cp\u003e20.4.3 Reg FD 496\u003c\/p\u003e \u003cp\u003e20.4.4 Decimalization of Stock Prices 496\u003c\/p\u003e \u003cp\u003e20.4.5 Technological Advances 496\u003c\/p\u003e \u003cp\u003e20.5 The Venerable Limit Order 497\u003c\/p\u003e \u003cp\u003e20.5.1 What Are Limit Orders? 497\u003c\/p\u003e \u003cp\u003e20.5.2 Creating Market Liquidity 498\u003c\/p\u003e \u003cp\u003e20.6 Market Microstructure 498\u003c\/p\u003e \u003cp\u003e20.6.1 Inventory Management 498\u003c\/p\u003e \u003cp\u003e20.6.2 Brokers 499\u003c\/p\u003e \u003cp\u003e20.7 High-Frequency Trading 499\u003c\/p\u003e \u003cp\u003e20.8 Alternative Trading Systems (ATSs) 500\u003c\/p\u003e \u003cp\u003e20.8.1 Crossing Networks 500\u003c\/p\u003e \u003cp\u003e20.8.2 Dark Pools 500\u003c\/p\u003e \u003cp\u003e20.9 Algorithmic Trading 501\u003c\/p\u003e \u003cp\u003e20.9.1 Some Algorithmic Trading Applications 501\u003c\/p\u003e \u003cp\u003e20.9.2 Trading Curbs 503\u003c\/p\u003e \u003cp\u003e20.9.3 Conclusions about Algorithmic Trading 504\u003c\/p\u003e \u003cp\u003e20.10 Symbiotic Stock Market Developments 505\u003c\/p\u003e \u003cp\u003e20.11 Detrimental Stock Market Developments 505\u003c\/p\u003e \u003cp\u003e20.12 Summary and Conclusions 506\u003c\/p\u003e \u003cp\u003eMathematical Appendixes 509\u003c\/p\u003e \u003cp\u003eBibliography 519\u003c\/p\u003e \u003cp\u003eAbout the Authors 539\u003c\/p\u003e \u003cp\u003eAuthor Index 541\u003c\/p\u003e \u003cp\u003eSubject Index 547\u003c\/p\u003e\u003c\/font\u003e\u003c\/p\u003e\r\n\r\n\u003cp\u003e\u003cfont size=\"3\"\u003eSubject Areas: Finance \u0026amp; accounting [\u003ca title=\"See our other books on Finance \u0026amp; accounting\" href=\"https:\/\/freshlyprintedbooks.co.uk\/search?q=%22Finance%20\u0026amp;%20accounting%20%5BKF%5D%22\"\u003eKF\u003c\/a\u003e]\u003c\/font\u003e\u003c\/p\u003e\r\n\r\n\r\n\u003c\/font\u003e","brand":"Wiley","offers":[{"title":"Brand New","offer_id":52165909250328,"sku":"9781118370520","price":51.75,"currency_code":"GBP","in_stock":true}],"thumbnail_url":"\/\/cdn.shopify.com\/s\/files\/1\/0730\/2037\/5320\/files\/9781118370520.jpg?v=1781101805","url":"https:\/\/freshlyprintedbooks.co.uk\/products\/modern-portfolio-theory-website-foundations-analysis-and-new-developments-hardback-9781118370520","provider":"Freshly Printed Books","version":"1.0","type":"link"}