INVESTMENTS WORKBOOK Principles of Portfolio and Equity Analysis CFAInstituteisthepremierassociationforinvestmentprofessionalsaroundtheworld,with over 101,000 members in 134 countries. Since 1963 the organization has developed and s administered the renowned Chartered Financial Analyst Program. With a rich history of leading the investment profession, CFA Institute has set the highest standards in ethics, education, and professional excellence within the global investment community, and is the foremost authority on investment profession conduct and practice. Each book in the CFA Institute Investment Series is geared toward industry practi- tioners along with graduate-level finance students and covers the most important topics in the industry. The authors of these cutting-edge books are themselves industry professionals and academics and bring their wealth of knowledge and expertise to this series. INVESTMENTS WORKBOOK Principles of Portfolio and Equity Analysis Michael G. McMillan, CFA Jerald E. Pinto, CFA Wendy L. Pirie, CFA Gerhard Van de Venter, CFA John Wiley & Sons, Inc. Copyrightr2011byCFAInstiute.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorby anymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermittedunder Section107or108ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthe Publisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc., 222RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)646-8600,oronthewebat www.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothePermissions Department,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011, fax(201)748-6008, oronlineathttp://www.wiley.com/go/permission. 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ISBN978-0-470-91582-0(paper); ISBN978-1-118-00117-2(ebk); ISBN978-1-118-00118-9(ebk); ISBN978-1-118-00119-6(ebk) PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 CONTENTS PART I Learning Outcomes, Summary Overview, and Problems CHAPTER 1 Market Organization and Structure 3 Learning Outcomes 3 Summary Overview 3 Problems 5 CHAPTER 2 Security Market Indices 13 Learning Outcomes 13 Summary Overview 13 Problems 14 CHAPTER 3 Market Efficiency 21 Learning Outcomes 21 Summary Overview 21 Problems 22 CHAPTER 4 Portfolio Management: An Overview 27 Learning Outcomes 27 Summary Overview 27 Problems 28 CHAPTER 5 Portfolio Risk and Return: Part I 31 Learning Outcomes 31 Summary Overview 31 Problems 32 v vi Contents CHAPTER 6 Portfolio Risk and Return: Part II 39 Learning Outcomes 39 Summary Overview 39 Problems 40 CHAPTER 7 Basics of Portfolio Planning and Construction 47 Learning Outcomes 47 Summary Overview 47 Problems 48 CHAPTER 8 Overview of Equity Securities 53 Learning Outcomes 53 Summary Overview 53 Problems 54 CHAPTER 9 Introduction to Industry and Company Analysis 59 Learning Outcomes 59 Summary Overview 59 Problems 62 CHAPTER 10 Equity Valuation: Concepts and Basic Tools 67 Learning Outcomes 67 Summary Overview 67 Problems 68 CHAPTER 11 Equity Market Valuation 75 Learning Outcomes 75 Summary Overview 75 Problems 77 CHAPTER 12 Technical Analysis 85 Learning Outcomes 85 Summary Overview 85 Problems 87 Contents vii PART II Solutions CHAPTER 1 Market Organization and Structure 95 Solutions 95 CHAPTER 2 Security Market Indices 99 Solutions 99 CHAPTER 3 Market Efficiency 103 Solutions 103 CHAPTER 4 Portfolio Management: An Overview 105 Solutions 105 CHAPTER 5 Portfolio Risk and Return: Part I 107 Solutions 107 CHAPTER 6 Portfolio Risk and Return: Part II 111 Solutions 111 CHAPTER 7 Basics of Portfolio Planning and Construction 115 Solutions 115 CHAPTER 8 Overview of Equity Securities 119 Solutions 119 CHAPTER 9 Introduction to Industry and Company Analysis 121 Solutions 121 CHAPTER 10 Equity Valuation: Concepts and Basic Tools 123 Solutions 123 viii Contents CHAPTER 11 Equity Market Valuation 127 Solutions 127 CHAPTER 12 Technical Analysis 131 Solutions 131 About the CFA Program 134