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| Preface | |
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| Introduction and the Institutional Environment | |
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| Introduction | |
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| The Stock Market Efficiency Question | |
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| Some History | |
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| The Role of Financial Information in the Market Efficiency Question | |
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| The Role of Organized Markets in the Market Efficiency Question | |
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| The Role of Trading in the Market Efficiency Question | |
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| The Role of Securities Market Regulation in the Market Efficiency Question | |
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| The Role of Stock Market Indicators in the Market Efficiency Question | |
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| Summary | |
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| References | |
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| Some Conventional Building Blocks (With Various Reservations) | |
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| Introduction | |
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| The St. Petersburg Paradox | |
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| von Neumann-Morgenstern Utility | |
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| Creating a "St. Petersburg Trust" | |
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| Some Problems with Aggregate Choice Behavior | |
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| Jeffersonian Realities | |
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| Conclusions | |
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| Problems | |
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| References | |
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| Diversification and Portfolio Selection | |
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| Introduction | |
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| Portfolio Design as Constrained Optimization | |
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| A Graphical Depiction | |
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| Other Approaches: Confidence Limits and Stochastic Dominance | |
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| Non-Utility Techniques | |
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| Portfolio Rebalancing | |
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| Problems | |
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| References | |
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| Capital Market Equilibrium Theories | |
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| Introduction: The Capital Market Line | |
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| The Security Market Line | |
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| The Sharpe Diagonal Model | |
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| Portfolio Evaluation and the Capital Asset Pricing Model (CAPM) | |
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| Arbitrage Pricing Theory (APT) and Fama-French (FF) | |
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| Interaction of Equilibrium and Efficiency | |
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| Expectations, Convergence, and the Efficient Market Hypothesis | |
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| Conclusions | |
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| Problems | |
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| References | |
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| Equilibrium Implying Efficiency: The Neoclassical Fantasy | |
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| Introduction | |
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| A Formal Restatement of the Hypothesis | |
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| Who Are the EMH Investors? | |
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| Some Early History | |
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| Science and the "Social Sciences" | |
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| Risk versus Uncertainty | |
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| The 1960s and 1970s | |
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| The Weak Form of the EMH | |
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| The Semi-Strong Form of the EMH | |
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| An Example of "Soft" Results Becoming "Conclusive" | |
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| Other Studies | |
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| Intertemporal Analyses | |
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| More Evidence That Markets Are Not Efficient | |
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| Conclusions | |
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| References | |
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| More Realistic Paradigms for Investment | |
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| Introduction | |
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| Growth | |
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| Rational Valuation and Growth | |
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| Momentum and Growth | |
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| An Application | |
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| The "Risk Profile" Approach to Stock Selection | |
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| The "Risk Profile" Approach After-Taxes and Transactions Costs | |
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| Realistic Capital Market Theory | |
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| Conclusions | |
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| Problems | |
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| References | |
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| Security Analysis | |
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| Introduction | |
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| Financial Statement Analysis | |
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| Ameritape, Inc. | |
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| The Auditor's Opinion | |
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| The Historical Record | |
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| Notes to the Financial Statement | |
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| The Most Recent Year and Ratio Calculations | |
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| Other Information | |
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| Projections and Evaluation | |
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| Accounting Numbers and Corporate Accountability | |
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| Problems | |
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| References | |
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| Empirical Financial Forecasting | |
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| Introduction | |
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| Forecasting as Regression | |
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| Data Analysis of Ameritape, Inc. | |
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| Conclusions and a Philosophy | |
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| Problems | |
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| References | |
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| Stock Price Growth as Noisy Compound Interest | |
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| Introduction | |
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| Stock Progression Using Binomial Trees | |
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| Estimating [mu] and [sigma] | |
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| Time Indexed Risk Profiling | |
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| Investing in a Sure Thing | |
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| Invsting in an Index Fund | |
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| Time Based Risk Profiling | |
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| A Resampling Approach | |
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| A Partially Privatized Social Security Plan | |
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| Index Funds as High Interest Paying Money Market Accounts | |
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| Gaussian Model versus Resampling | |
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| Stock Progression Using Differential Equations | |
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| Ito's Lemma | |
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| A Geometric Brownian Model for Stocks | |
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| Conclusions | |
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| Problems | |
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| References | |
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| Investing in Real World Markets: Returns and Risk Profiles | |
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| Introduction | |
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| Ameritape Revisted | |
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| Forecasting: A Reality Check | |
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| Other Scenarios | |
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| The Time Indexed Distribution of Portfolio Value | |
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| Negatively Correlated Portfolios | |
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| Bear Jumps | |
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| Conclusions | |
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| Problems | |
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| References | |
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| Common Stock Options | |
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| Introduction | |
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| Black--Scholes and the Search for Risk Neutrality | |
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| Option Writers and Bookies | |
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| Alternative Pricing Models | |
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| The Black--Scholes Hedge Using Binomial Trees | |
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| A Game Independent of the Odds | |
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| The Black--Scholes Derivation Using Differential Equations | |
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| Black--Scholes: Some Limiting Cases | |
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| Conclusions | |
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| Problems | |
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| References | |
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| Summary, Some Unsettled (Unsettling) Questions, and Conclusions | |
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| Summary | |
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| What Is Uncertainty Aversion? | |
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| Can There Still Be Differential Uncertainty Premia? | |
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| Is Equity Premia Belief Sufficient to (at least) Index? | |
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| Does This Mean We Are Advocating Behavioral Finance? | |
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| What Strategies Might Hold Promise? | |
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| Conclusions | |
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| Assignment | |
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| References | |
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| A Brief Introduction to Probability and Statistics | |
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| Craps: An Intuitive Introduction to Probability | |
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| Random Variables, Their Means and Variances | |
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| Combinatorics Basics | |
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| Bayesian Statistics | |
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| Bayes' Theorem | |
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| A Diagnostic Example | |
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| The Binomial Distribution | |
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| The Uniform Distribution | |
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| Moment--Generating Functions | |
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| The Normal (Gaussian) Distribution | |
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| The Central Limit Theorem | |
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| The Gamma Distribution | |
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| Conditional Density Functions | |
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| The Weak Law of Large Numbers | |
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| The Multivariate Normal Distribution | |
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| The Wiener Process | |
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| The Poisson Process and the Poisson Distribution | |
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| Simulating Bear Jumps | |
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| Parametric Simulation | |
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| Simulating a Geometric Brownian Walk | |
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| The Multivariate Case | |
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| Resampling Simulation | |
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| The Multivariate Case | |
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| A Portfolio Case Study | |
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| A Simple Optimization Algorithm That (Usually) Works | |
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| Statistical Tables | |
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| Tables of the Normal Distribution | |
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| Tables of the Chi-Square Distribution | |
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| Index | |