Download STOCK-TRAK

Bodie−Kane−Marcus:
Essentials of Investments,
Sixth Edition
Back Matter
Endpapers
© The McGraw−Hill
Companies, 2007
Are you looking for a way to get your students
actively involved in real-world investing?
Give your students a practical application that will last them a
lifetime by subscribing to
STOCK-TRAK
Portfolio Simulations
w w w . s t o c k t r a k . c o m
STOCK-TRAK is the most comprehensive online trading simulation featuring stocks, bonds,
mutual funds, options, futures, spots, future options, and international stocks, created
specifically for classroom use. STOCK-TRAK is used by over 800 professors and 40,000
students worldwide each year.
Students receive $500,000 of hypothetical money in a STOCK-TRAK brokerage account, a
toll-free number for web page support and customer service, and 24/7 access to their
accounts. No other simulation can offer all of these features!
Instructors customize STOCK-TRAK to fit their class by choosing the starting and ending
date of their trading period, initial cash balance, and diversification requirements. Instructors
also have 24/7 access to their students’ ranking and account detail so they can see exactly
what their students are doing, and they receive weekly reports of class performance.
STOCK-TRAK can be used as homework, end-of-course project, class contest, extra
credit, or just as a discussion starter in class.
There is a separate cost for using STOCK-TRAK with this text. Students who sign up using
the Bodie/Kane/Marcus text and entering Promotional code: BK0905 will receive $5.00 off
the fee. Check out the website at www.stocktrak.com for current prices for subscribing to a
semester of STOCK-TRAK, a demo of the product, and more ideas on how to use this
simulation in class.
Apply Bodie/Kane/Marcus’ investments concepts with STOCK-TRAK!
Bodie−Kane−Marcus:
Essentials of Investments,
Sixth Edition
Back Matter
© The McGraw−Hill
Companies, 2007
Endpapers
Commonly Used Notation
b
Retention or plowback ratio
C
Call option value
CF
rM
Cash flow
D
Duration
E
Exchange rate
E(x)
rf
Expected value of random variable x
F
Futures price
e
2.718, the base for the natural
logarithm, used for continuous
compounding
ROE
Sp
t
The risk-free rate of interest
The rate of return on the market
portfolio
Return on equity, incremental
economic earnings per dollar
reinvested in the firm
Reward-to-volatility ratio of a
portfolio, also called Sharpe’s
measure; the excess expected return
divided by the standard deviation
Time
The firm-specific return, also called
the residual return, of security i in
period t
Tp
Treynor’s measure for a portfolio,
excess expected return divided by
beta
f
Forward rate of interest
V
g
Growth rate of dividends
Intrinsic value of a firm, the present
value of future dividends per share
H
Hedge ratio for an option,
sometimes called the option’s delta
X
Exercise price of an option
y
Yield to maturity
␣
Rate of return beyond the value that
would be forecast from the market’s
return and the systematic risk of the
security
␤
Systematic or market risk of a
security
ei t
i
Inflation rate
k
Market capitalization rate, the
required rate of return on a firm’s
stock
ln
Natural logarithm function
M
The market portfolio
␳i j
Cumulative normal function, the
probability that a standard normal
random variable will have value less
than d
Correlation coefficient between
returns on securities i and j
␴
Standard deviation
N(d)
p
Probability
P
Put value
PV
Present value
P/E
Price-to-earnings multiple
r
Rate of return on a security; for
fixed-income securities, r may
denote the rate of interest for a
particular period
␴
2
Cov(ri , rj)
Variance
Covariance between returns on
securities i and j
Bodie−Kane−Marcus:
Essentials of Investments,
Sixth Edition
Back Matter
Endpapers
© The McGraw−Hill
Companies, 2007
Useful Web sites
General business and finance information
www.dowjones.com
www.economist.com
www.wsj.com
www.ft.com
www.businessweek.com
www.euromoney.com
www.forbes.com
www.fortune.com
The Economist
The Wall Street Journal
The Financial Times
BusinessWeek
Sources of data on individual companies and industries
www.mhhe.com/edumarketinsight
Available to users of this text, a source of extensive financial
statement data as well as stock price histories
www.bloomberg.com
Stock price and company information
finance.yahoo.com
money.cnn.com
www.hoovers.com
Annual reports
www.annualreports.com
www.sec.gov
Annual reports and other financial statements from the
EDGAR database
Macroeconomic data
www.bea.doc.gov
www.federalreserve.gov
www.fms.treas.gov
stats.bls.gov
Bureau of Economic Analysis, Department of Commerce
Board of Governors of the Federal Reserve System
Links to publications of the Treasury Department
Bureau of Labor Statistics
Sites with links to other resources
www.financewise.com
www.investorlinks.com
www.finpipe.com
www.corpfinet.com
www.ceoexpress.com
www.cob.ohio-state.edu/fin/journal/jofsites.htm (site maintained by Ohio State University
College of Business)
Bodie−Kane−Marcus:
Essentials of Investments,
Sixth Edition
Back Matter
© The McGraw−Hill
Companies, 2007
Endpapers
Useful Formulas
Measures of Risk
Variance of returns:
␴2 ⫽ 兺 p(s)[r (s) ⫺ E(r)]2
Standard deviation:
␴ ⫽ 2␴2
s
Covariance between
Cov(ri , rj ) ⫽ 兺 p(s)[ri (s) ⫺ E(ri)] [rj (s) ⫺ E(rj )]
returns:
s
Cov(ri , rM)
Beta of security i:
␤i ⫽
Var(rM)
Portfolio Theory
Expected rate of return on a portfolio
with weights wi in each security:
E(rp) ⫽
Variance of portfolio rate of return:
␴2p ⫽
n
n
兺 wi E(ri)
i⫽1
n
兺 兺 wj wi Cov(ri , rj)
j⫽1 i⫽1
Market Equilibrium
The security market line:
E(ri) ⫽ rf ⫹ ␤i[E(rM) ⫺ rf]
Fixed-Income Analysis
Present value of $1:
Discrete period compounding:
Continuous compounding:
PV ⫽ 1/(1 ⫹ r)T
PV ⫽ e⫺rT
Forward rate of interest for period T:
Real interest rate:
r⫽
fT ⫽
(1 ⫹ yT)T
⫺1
(1 ⫹ yT⫺1)T⫺1
1⫹R
⫺1
1⫹i
where R is the nominal interest rate
and i is the inflation rate
Duration of a security:
Modified duration:
D⫽
T
CF
兺 t ⫻ (1 ⫹ ty)t /Price
t⫽1
D* ⫽ D/(1 ⫹ y)
Bodie−Kane−Marcus:
Essentials of Investments,
Sixth Edition
Back Matter
© The McGraw−Hill
Companies, 2007
Endpapers
Equity Analysis
D1
k⫺g
Sustainable growth rate of dividends: g ⫽ ROE ⫻ b
1⫺b
Price/earnings multiple: P/E ⫽
k ⫺ ROE ⫻ b
Constant growth dividend discount model:
V0 ⫽
ROE ⫽ (1 ⫺ Tax rate) £ROA ⫹ (ROA ⫺ Interest rate)
Debt
§
Equity
Derivative Assets
Put-call parity:
P ⫽ C ⫺ S0 ⫹ PV(X ⫹ dividends)
Black-Scholes formula:
Spot-futures parity:
Interest rate parity:
C ⫽ Se⫺␦TN(d1) ⫺ Xe⫺rT N(d2)
ln (S/X) ⫹ (r ⫺ ␦ ⫹ ␴2/2)T
d1 ⫽
␴2T
d2 ⫽ d1 ⫺ ␴2T
F0 ⫽ S0(1 ⫹ r ⫺ d)T
1 ⫹ rUS T
F0 ⫽ E0 q
r
1 ⫹ rforeign
Performance Evaluation
Sharpe’s measure:
Sp ⫽
Treynor’s measure:
Tp ⫽
–r ⫺ –r
p
f
␴p
–r ⫺ –r
p
f
Jensen’s measure, or alpha:
␤p
rp ⫺ [ –rf ⫹ ␤p(–rM ⫺ –rf)]
␣p ⫽ –
Geometric average return:
rG ⫽ [(1 ⫹ r1)(1 ⫹ r2) . . . (1 ⫹ rT)]1/T ⫺ 1