Investment Science

ISBN-10: 0195108094
ISBN-13: 9780195108095
Edition: 1998
List price: $149.95
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Description: Fueled in part by some extraordinary theoretical developments in finance, an explosive growth of information and computing technology, and the global expansion of investment activity, investment theory currently commands a high level of intellectual  More...

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Book details

List price: $149.95
Copyright year: 1998
Publisher: Oxford University Press, Incorporated
Publication date: 7/3/1997
Binding: Hardcover
Pages: 512
Size: 7.75" wide x 9.50" long x 1.00" tall
Weight: 2.596
Language: English

Fueled in part by some extraordinary theoretical developments in finance, an explosive growth of information and computing technology, and the global expansion of investment activity, investment theory currently commands a high level of intellectual attention. Recent developments in the field are being infused into university classrooms, financial service organizations, business ventures, and into the awareness of many individual investors. Modern investment theory using the language of mathematics is now an essential aspect of academic and practitioner training. Representing a breakthrough in the organization of finance topics, Investment Science will be an indispensable tool in teaching modern investment theory. It presents sound fundamentals and shows how real problems can be solved with modern, yet simple, methods. David Luenberger gives thorough yet highly accessible mathematical coverage of standard and recent topics of introductory investments: fixed-income securities, modern portfolio theory and capital asset pricing theory, derivatives (futures, options, and swaps), and innovations in optimal portfolio growth and valuation of multiperiod risky investments. Throughout the book, he uses mathematics to present essential ideas of investments and their applications in business practice. The creative use of binomial lattices to formulate and solve a wide variety of important finance problems is a special feature of the book. In moving from fixed-income securities to derivatives, Luenberger increases naturally the level of mathematical sophistication, but never goes beyond algebra, elementary statistics/probability, and calculus. He includes appendices on probability and calculus at the end of the book for student reference. Creative examples and end-of-chapter exercises are also included to provide additional applications of principles given in the text. Ideal for investment or investment management courses in finance, engineering economics, operations research, and management science departments, Investment Science has been successfully class-tested at Boston University, Stanford University, and the University of Strathclyde, Scotland, and used in several firms where knowledge of investment principles is essential. Executives, managers, financial analysts, and project engineers responsible for evaluation and structuring of investments will also find the book beneficial. The methods described are useful in almost every field, including high-technology, utilities, financial service organizations, and manufacturing companies.

Introduction
Cash Flows
Investments and Markets
Typical Investment Problems
Organization of the Book
Deterministic Cash Flow Streams
The Basic Theory of Interest
Principal and Interest
Present Value
Present and Future Values of Streams
Internal Rate of Return
Evaluation Criteria
Applications and Extensions
Summary
Exercises
Fixed-Income Securities
The Market for Future Cash
Value Formulas
Bond Details
Yield
Duration
Immunization
Convexity
Summary
Exercises
The Term Structure of Interest Rates
The Yield Curve
The Term Structure
Forward Rates
Term Structure Explanations
Expectation Dynamics
Running Present Value
Floating Rate Bonds
Duration
Immunization
Summary
Exercises
Applied Interest Rate Analysis
Capital Budgeting
Optimal Portfolios
Dynamic Cash Flow Processes
Optimal Management
The Harmony Theorem
Valuation of a Firm
Summary
Exercises
Single-Period Random Cash Flows
Mean-Variance Portfolio Theory
Asset Return
Random Variables
Random Returns
Portfolio Mean and Variance
The Feasible Set
The Markowitz Model
The Two-Fund Theorem
Inclusion of a Risk-Free Asset
The One-Fund Theorem
Summary
Exercises
The Capital Asset Pricing Model
Market Equilibrium
The Capital Market Line
The Pricing Model
The Security Market Line
Investment Implications
Performance Evaluation
CAPM as a Pricing Formula
Project Choice
Summary
Exercises
Models and Data
Introduction
Factor Models
The CAPM as a Factor Model
Arbitrage Pricing Theory
Data and Statistics
Estimation of Other Parameters
Tilting Away from Equilibrium
A Multiperiod Fallacy
Summary
Exercises
General Principles
Introduction
Utility Functions
Risk Aversion
Specification of Utility Functions
Utility Functions and the Mean-Variance Criterion
Linear Pricing
Portfolio Choice
Log-Optimal Pricing
Finite State Models
Risk-Neutral Pricing
Pricing Alternatives
Summary
Exercises
Derivative Securities
Forwards, Futures, and Swaps
Introduction
Forward Contracts
Forward Prices
The Value of a Forward Contract
Swaps
Basics of Futures Contracts
Futures Prices
Relation to Expected Spot Price
The Perfect Hedge
The Minimum-Variance Hedge
Optimal Hedging
Hedging Nonlinear Risk
Summary
Exercises
Models of Asset Dynamics
Binominal Lattice Model
The Additive Model
The Multiplicative Model
Typical Parameter Values
Lognormal Random Variables
Random Walks and Wiener Processes
A Stock Price Process
Ito's Lemma
Binomial Lattice Revisited
Summary
Exercises
References
Basic Options Theory
Option Concepts
The Nature of Option Value
Option Combinations and Put-Call Parity
Early Exercise
Single-Period Binomial Options Theory
Multiperiod Options
More General Binomial Problems
Evaluating Real Investment Opportunities
General Risk-Neutral Pricing
Summary
Exercises
References
Additional Options Topics
Introduction
The Black-Scholes Equation
Call Option Formula
Risk-Neutral Valuation
Delta
Replication, Synthetic Options, and Portfolio Insurance/st
Computational Methods
Exotic Options
Storage Costs and Dividends
Martingale Pricing
Summary
Exercises
References
Interest Rate Derivatives
Examples of Interest-Rate Derivatives
The Need for a Theory
The Binomial Approach
Pricing Applications
Leveling and Adjustable-Rate Loans
The Forward Equation
Matching the Term Structure
Immunization
Collateralized Mortgage Obligations
Models of Interest Rate Dynamics
Continuous-Time Solutions
Summary
Exercises
References
General Cash Flow Streams
Optimal Portfolio Growth
The Investment Wheel
The Log Utility Approach to Growth
Properties of the Log-Optimal Strategy
Alternative Approaches
Continuous-Time Growth
The Feasible Region
The Log-Optimal Pricing Formula
Log-Optimal Pricing and the Black-Scholes Equation
Summary
Exercises
References
General Investment Evaluation
Multiperiod Securities
Risk-Neutral Pricing
Optimal Pricing
The Double Lattice
Pricing in a Double Lattice
Investments with Private Uncertainty
Buying Price Analysis
Continuous-Time Evaluation
Summary
Exercises
References
Basic Probability Theory
General Concepts
Normal Random Variables
Lognormal Random Variables
Calculus and Optimization
Functions
Differential Calculus
Optimization

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