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TWELFTHedition
ZVI BODIE
BostonUniversity
ALEXKANE
Universityof California,SanDiego
ALANJ.MARCUS
BostonCollege
Image
INVESTMENTS,TWELFTHEDITION
PublishedbyMcGraw-Hill Education,2PennPlaza,NewYork,NY10121. Copyright ©2021byMcGraw-Hill Education.All rightsreserved.Printed intheUnitedStatesof America.Previouseditions©2018,2014,and 2011.Nopart of thispublicationmaybereproducedor distributedinany form or byanymeans,or storedinadatabaseor retrieval system,without theprior writtenconsent of McGraw-Hill Education,including,but not limitedto,inanynetworkor other electronicstorageor transmission,or broadcast for distancelearning.
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Libraryof CongressCataloging-in-PublicationData
Names: Bodie,Zvi,author.|Kane,Alex,1942- author.|Marcus,AlanJ., author.
Title: Investments/ Zvi Bodie,BostonUniversity,AlexKane,University of California,SanDiego,AlanJ.Marcus,BostonCollege.
Description: Twelfthedition.|NewYork,NY: McGraw-Hill Education, [2021] |Includesindex.|Audience: Ages18+
Identifiers: LCCN2019036134|ISBN9781260013832(boundedition) | ISBN 1260013839(boundedition) |ISBN9781260819380(loose-leaf edition) | ISBN1260819388(loose-leaf edition) |ISBN9781260819427(ebook)
Subjects: LCSH: Investments.|Portfoliomanagement.
Classification: LCCHG4521.B5642021|DDC332.6—dc23
LCrecordavailableat https://lccn.loc.gov/2019036134
TheInternet addresseslistedinthetext wereaccurateat thetimeof publication.Theinclusionof awebsitedoesnot indicateanendorsement bytheauthorsor McGraw-Hill Education,andMcGraw-Hill Education doesnot guaranteetheaccuracyof theinformationpresentedat thesesites. mheducation.com/highered
About theAuthors
ZVI BODIE
BostonUniversity
Zvi BodieisProfessor Emeritusat BostonUniversity.HeholdsaPhD from theMassachusettsInstituteof Technologyandhasservedonthe financefacultyat theHarvardBusinessSchool andMIT’sSloanSchool of Management.Hehaspublishedwidelyinscholarlyandprofessional journalsonpensioninvestment strategyandlife-cycleasset-liability matching.In2007theRetirement IncomeIndustryAssociationgavehim itsLifetimeAchievement Awardfor appliedresearch.
ALEXKANE
Universityof California,SanDiego
AlexKaneholdsaPhDfrom theSternSchool of Businessof NewYork UniversityandhasbeenVisitingProfessor at theFacultyof Economics, Universityof Tokyo; GraduateSchool of Business,Harvard; Kennedy School of Government,Harvard; andResearchAssociate,National Bureau of EconomicResearch.Anauthor of manyarticlesinfinanceand management journals,Professor Kane’sresearchismainlyincorporate finance,portfoliomanagement,andcapital markets.
ALANJ.MARCUS
BostonCollege
AlanMarcusistheMarioJ.Gabelli Professor of FinanceintheCarroll School of Management at BostonCollege.HereceivedhisPhDin economicsfrom MIT.Professor Marcushasbeenavisitingprofessor at theAthensLaboratoryof BusinessAdministrationandat MIT’sSloan School of Management andhasservedasaresearchassociateat the National Bureauof EconomicResearch.Professor Marcushaspublished
widelyinthefieldsof capital marketsandportfoliomanagement.His consultingworkhasrangedfrom new-product development toprovisionof expert testimonyinutilityrateproceedings.Healsospent twoyearsat the Federal HomeLoanMortgageCorporation(FreddieMac),wherehe developedmodelsof mortgagepricingandcredit risk.Hecurrentlyserves ontheResearchFoundationAdvisoryBoardof theCFAInstitute.
pageviii
Contents
Prefacexvi
PARTI
Introduction1
Chapter 1
TheInvestment Environment 1
1.1Real AssetsversusFinancial Assets2
1.2Financial Assets3
1.3Financial MarketsandtheEconomy5
TheInformational Roleof Financial Markets/ ConsumptionTiming/ Allocationof Risk/ Separationof OwnershipandManagement / Corporate GovernanceandCorporateEthics
1.4TheInvestment Process8
1.5MarketsAreCompetitive9
TheRisk–ReturnTrade-Off / Efficient Markets
1.6ThePlayers11
Financial Intermediaries/ Investment Bankers/ VentureCapital and PrivateEquity/ FintechandFinancial Innovation
1.7TheFinancial Crisisof 2008-200916
Antecedentsof theCrisis/ ChangesinHousingFinance/ Mortgage Derivatives/ Credit Default Swaps/ TheRiseof SystemicRisk/ TheShoe Drops/ TheDodd-FrankReform Act
1.8Outlineof theText 24
Endof Chapter Material 24–28
Chapter 2
Asset ClassesandFinancial Instruments29
2.1TheMoneyMarket 29
TreasuryBills/ Certificatesof Deposit / Commercial Paper / Bankers’ Acceptances/ Eurodollars/ ReposandReverses/ Federal Funds/ Brokers’ Calls/ TheLIBORMarket / YieldsonMoneyMarket Instruments/ Money Market Funds
2.2TheBondMarket 35
TreasuryNotesandBonds/ Inflation-ProtectedTreasuryBonds/ Federal AgencyDebt / International Bonds/ Municipal Bonds/ CorporateBonds/ MortgageandAsset-BackedSecurities
2.3EquitySecurities42
CommonStockasOwnershipShares/ Characteristicsof CommonStock/ StockMarket Listings/ PreferredStock/ DepositaryReceipts
2.4StockandBondMarket Indexes45
StockMarket Indexes/ DowJonesIndustrial Average/ TheStandard& Poor’s500Index/ Other U.S.Market-ValueIndexes/ EquallyWeighted Indexes/ ForeignandInternational StockMarket Indexes/ BondMarket Indicators
2.5DerivativeMarkets52
Options/ FuturesContracts
Endof Chapter Material 54–58
Chapter 3
HowSecuritiesAreTraded59
3.1HowFirmsIssueSecurities59
PrivatelyHeldFirms/ PubliclyTradedCompanies/ Shelf Registration/ Initial PublicOfferings
3.2HowSecuritiesAreTraded64
Typesof Markets
Direct SearchMarkets/ BrokeredMarkets/ Dealer Markets/ Auction Markets
Typesof Orders
Market Orders/ Price-Contingent Orders
TradingMechanisms pageix
Dealer Markets/ ElectronicCommunicationNetworks(ECNs) / Specialist/DMMMarkets
3.3TheRiseof ElectronicTrading68
3.4U.S.Markets70
NASDAQ/ TheNewYorkStockExchange/ ECNs
3.5NewTradingStrategies72
HowFundsAreSold
4.4Costsof InvestinginMutual Funds101
FeeStructure
OperatingExpenses/ Front-EndLoad/ Back-EndLoad/ 12b-1Charges
FeesandMutual FundReturns
4.5Taxationof Mutual FundIncome104
4.6Exchange-TradedFunds105
4.7Mutual FundInvestment Performance: AFirst Look108
4.8InformationonMutual Funds111
Endof Chapter Material 114–118
PARTII
PortfolioTheoryandPractice119
Chapter 5
Risk,Return,andtheHistorical Record119
5.1MeasuringReturnsover Different HoldingPeriods120
Annual PercentageRates/ ContinuousCompounding
5.2Interest RatesandInflationRates123
Real andNominal Ratesof Interest / TheEquilibrium Real Rateof Interest / Interest RatesandInflation/ TaxesandtheReal Rateof Interest / TreasuryBillsandInflation,1926–2018
5.3RiskandRiskPremiums127
Holding-PeriodReturns/ ExpectedReturnandStandardDeviation/ ExcessReturnsandRiskPremiums
5.4Learningfrom Historical Returns131
TimeSeriesversusScenarioAnalysis/ ExpectedReturnsandthe ArithmeticAverage/ TheGeometric(Time-Weighted) AverageReturn/ EstimatingVarianceandStandardDeviation/ MeanandStandard DeviationEstimatesfrom Higher-FrequencyObservations/ TheRewardto-Volatility(Sharpe) Ratio
5.5TheNormal Distribution136
5.6Deviationsfrom NormalityandTail Risk138
Valueat Risk/ ExpectedShortfall / Lower Partial StandardDeviationand theSortinoRatio/ RelativeFrequencyof Large,Negative3-Sigma Returns
5.7HistoricReturnsonRiskyPortfolios141
AGlobal Viewof theHistorical Record
5.8NormalityandLong-Term Investments149
Short-RunversusLong-RunRisk/ Forecastsfor theLongHaul Endof Chapter Material 153–158
Chapter 6
Capital AllocationtoRiskyAssets159
6.1RiskandRiskAversion160
Risk,Speculation,andGambling/ RiskAversionandUtilityValues/ EstimatingRiskAversion
6.2Capital AllocationacrossRiskyandRisk-FreePortfolios165
6.3TheRisk-FreeAsset 168 pagex
6.4Portfoliosof OneRiskyAsset andaRisk-FreeAsset 168
6.5RiskToleranceandAsset Allocation171 Non-Normal Returns
6.6PassiveStrategies: TheCapital Market Line177
Endof Chapter Material 179–187
AppendixA: RiskAversion,ExpectedUtility,andtheSt.Petersburg Paradox188
Chapter 7
Efficient Diversification193
7.1DiversificationandPortfolioRisk194
7.2Portfoliosof TwoRiskyAssets195
7.3Asset AllocationwithStocks,Bonds,andBills203
Asset AllocationwithTwoRiskyAsset Classes
7.4TheMarkowitzPortfolioOptimizationModel 208
SecuritySelection/ Capital AllocationandtheSeparationProperty/ The Power of Diversification/ Asset AllocationandSecuritySelection/ Optimal PortfoliosandNon-Normal Returns
7.5RiskPooling,RiskSharing,andTimeDiversification217
RiskSharingversusRiskPooling/ TimeDiversification
Endof Chapter Material 220–230
AppendixA: ASpreadsheet Model for Efficient Diversification230
AppendixB: Reviewof PortfolioStatistics235
Chapter 8
IndexModels243
8.1ASingle-Factor SecurityMarket 244
TheInput List of theMarkowitzModel / SystematicversusFirm-Specific Risk
8.2TheSingle-IndexModel 246
TheRegressionEquationof theSingle-IndexModel / TheExpected Return–BetaRelationship/ RiskandCovarianceintheSingle-Index Model / TheSet of EstimatesNeededfor theSingle-IndexModel / The IndexModel andDiversification
8.3EstimatingtheSingle-IndexModel 253
TheSecurityCharacteristicLinefor Amazon/ TheExplanatoryPower of Amazon’sSCL/ TheEstimateof Alpha/ TheEstimateof Beta/ FirmSpecificRisk
Typical Resultsfrom IndexModel Regressions
8.4TheIndustryVersionof theIndexModel 257
PredictingBetas
8.5PortfolioConstructionUsingtheSingle-IndexModel 260
AlphaandSecurityAnalysis/ TheIndexPortfolioasanInvestment Asset / TheSingle-IndexModel Input List / TheOptimal RiskyPortfoliointhe
Single-IndexModel / TheInformationRatio/ Summaryof Optimization Procedure/ AnExample/ CorrelationandCovarianceMatrix
RiskPremium Forecasts/ TheOptimal RiskyPortfolio/ IstheIndex Model Inferior totheFull-CovarianceModel?
Endof Chapter Material 269–274
PARTIII
Equilibrium inCapital Markets275
Chapter 9
TheCapital Asset PricingModel 275
9.1TheCapital Asset PricingModel 275
TheMarket Portfolio/ ThePassiveStrategyIsEfficient / TheRisk Premium of theMarket Portfolio/ ExpectedReturnsonIndividual Securities/ TheSecurityMarket Line/ TheCAPMandtheSingle-Index Market
9.2AssumptionsandExtensionsof theCAPM286
Identical Input Lists/ Risk-FreeBorrowingandtheZero-BetaModel / Labor IncomeandOther NontradedAssets/ AMultiperiodModel and HedgePortfolios/ AConsumption-BasedCAPM/ Liquidityandthe CAPM
9.3TheCAPMandtheAcademicWorld296
9.4TheCAPMandtheInvestment Industry297
Endof Chapter Material 298–306
Chapter 10
ArbitragePricingTheoryandMultifactor Modelsof RiskandReturn307
10.1Multifactor Models: APreview308
Factor Modelsof SecurityReturns
10.2ArbitragePricingTheory310
Arbitrage,RiskArbitrage,andEquilibrium / DiversificationinaSingleFactor SecurityMarket / Well-DiversifiedPortfolios/ TheSecurity Market Lineof theAPT
Individual AssetsandtheAPT
Well-DiversifiedPortfoliosinPractice
10.3TheAPTandtheCAPM317
10.4AMultifactor APT318
pagexi
10.5TheFama-French(FF) Three-Factor Model 321
EstimatingandImplementingaThree-Factor SML/ Smart Betasand Multifactor Models
Endof Chapter Material 325–330
Chapter 11
TheEfficient Market Hypothesis331
11.1Random WalksandEfficient Markets332
CompetitionastheSourceof Efficiency/ Versionsof theEfficient Market Hypothesis
11.2Implicationsof theEMH336
Technical Analysis/ Fundamental Analysis/ ActiveversusPassive PortfolioManagement / TheRoleof PortfolioManagement inanEfficient Market / ResourceAllocation
11.3Event Studies341
11.4AreMarketsEfficient?345
TheIssues
TheMagnitudeIssue/ TheSelectionBiasIssue/ TheLuckyEvent Issue
Weak-Form Tests: PatternsinStockReturns
Returnsover Short Horizons/ Returnsover LongHorizons
Predictorsof BroadMarket Returns/ SemistrongTests: Market Anomalies
TheSmall-Firm Effect / TheNeglected-Firm andLiquidityEffects/ Book-to-Market Ratios/ Post–Earnings-Announcement PriceDrift / Other Predictorsof StockReturns
Strong-Form Tests: InsideInformation/ InterpretingtheAnomalies
RiskPremiumsor Inefficiencies?/ Anomaliesor DataMining?/ Anomaliesover Time
BubblesandMarket Efficiency
11.5Mutual FundandAnalyst Performance358
StockMarket Analysts/ Mutual FundManagers/ So,AreMarkets Efficient?
Endof Chapter Material 363–370
Chapter 12
Behavioral FinanceandTechnical Analysis371
12.1TheBehavioral Critique372
InformationProcessing
LimitedAttention,Underreaction,andOverreaction/ Overconfidence/ Conservatism / ExtrapolationandPatternRecognition
Behavioral Biases
Framing/ Mental Accounting/ Regret Avoidance/ Affect andFeelings/ Prospect Theory
LimitstoArbitrage
Fundamental Risk/ ImplementationCosts/ Model Risk
LimitstoArbitrageandtheLawof OnePrice
“SiameseTwin”Companies/ EquityCarve-Outs/ Closed-EndFunds
BubblesandBehavioral Economics/ EvaluatingtheBehavioral Critique
12.2Technical AnalysisandBehavioral Finance382
TrendsandCorrections
Momentum andMovingAverages/ RelativeStrength/ Breadth
Sentiment Indicators
TrinStatistic/ ConfidenceIndex/ Short Interest / Put/Call Ratio
AWarning
Endof Chapter Material 389–394
Chapter 13
Empirical EvidenceonSecurityReturns395
13.1TheIndexModel andtheSingle-Factor SML396
TheExpectedReturn–BetaRelationship
SettingUptheSampleData/ EstimatingtheSCL/ EstimatingtheSML
Testsof theCAPM/ TheMarket Index/ Measurement Error inBeta
13.2Testsof theMultifactor Models401
Labor Income/ Private(Nontraded) Business/ EarlyTestsof the Multifactor CAPMandAPT/ AMacroFactor Model
13.3Fama-French-TypeFactor Models405
SizeandB/MasRiskFactors/ Behavioral Explanations/ Momentum: A FourthFactor / CharacteristicsversusFactor Sensitivities
13.4LiquidityandAsset Pricing413
13.5Consumption-BasedAsset PricingandtheEquityPremium Puzzle 415
ExpectedversusRealizedReturns/ SurvivorshipBias/ Extensionstothe CAPMMayResolvetheEquityPremium Puzzle/ Liquidityandthe EquityPremium Puzzle/ Behavioral Explanationsof theEquityPremium Puzzle
Endof Chapter Material 421–424
pagexii
PARTIV
Fixed-IncomeSecurities425
Chapter 14
BondPricesandYields425
14.1BondCharacteristics426
TreasuryBondsandNotes
AccruedInterest andQuotedBondPrices
CorporateBonds
Call ProvisionsonCorporateBonds/ ConvertibleBonds/ PuttableBonds/ Floating-RateBonds
PreferredStock/ Other DomesticIssuers/ International Bonds/ InnovationintheBondMarket
InverseFloaters/ Asset-BackedBonds/ CatastropheBonds/ Indexed Bonds
14.2BondPricing432
BondPricingbetweenCouponDates
14.3BondYields438
YieldtoMaturity/ YieldtoCall / RealizedCompoundReturnversusYield toMaturity
14.4BondPricesover Time444
YieldtoMaturityversusHolding-PeriodReturn/ Zero-CouponBondsand TreasuryStrips/ After-TaxReturns
14.5Default RiskandBondPricing449
JunkBonds/ Determinantsof BondSafety/ BondIndentures
SinkingFunds/ Subordinationof Further Debt / DividendRestrictions/ Collateral