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Nothing gets online traders clicking their "buy" icons so fast as a hot IPO. Recently, demand from small investors using the Internet has led to huge price increases in shares of newly floated companies after their initial public offerings. How frustrating, then, that these online traders can rarely buy IPO shares when they are handed out. They have to wait until they are traded in the market, usually at well above the offer price.

Now, help may be at hand from a new breed of Internet-based investment banks, such as E*Offering, Wit Capital and W. R. Hambrecht, which has just completed its first online IPO. Wit, a 16-month-old veteran, was formed by Andrew Klein, who in 1995 completed the articles are chosen for relevance, clarity of presentation, and consistency with good sense.

Burnham, an analyst with CSFB, an investment bank, Wall Street only lets them in on a deal when it is "hard to move."

The new Internet investment banks aim to change this by becoming part of the syndicates that manage share-offerings. This means persuading company bosses to let them help take their firms public. They have been hiring mainstream investment bankers to establish credibility, in the hope, ultimately, of winning a leading role in a syndicate. This would win them real influence over who gets shares. (So far, Wit has been a co-manager in only four deals.)

Established Wall Street houses will do all they can to

- Excel Applications

New to the Fifth Edition are boxes featuring Excel Spreadsheet Applications. A sample spreadsheet is presented in the text with an interactive version and related questions available on the book website at www.mhhe.com/bkm.



The accompanying spreadsheet can be used to measure the return on investment for buying stocks on margin. The model is set up to allow the holding period to vary. The model also calculates the price at which you would get a margin call based on a specified mainte-








Buying on Margin


Return on


St Price



Initial Equity Investment




Amount Borrowed





Initial Stock Price





Shares Purchased





Ending Stock Price





Cash Dividends During Hold Per.





50 00%


-22 00%

- Summary and End of Chapter Problems_

At the end of each chapter, a detailed Summary outlines the most important concepts presented. The problems that follow the Summary progress from simple to challenging and many are taken from CFA

examinations. These represent the kinds of questions that professionals in the field believe are relevant to the "real world" and are indicated by an icon in the text margin.

Firms issue securities to raise the capital necessary to finance their investments. Investment bankers market these securities to the public on the primary market. Investment bankers generally act as underwriters who purchase the securities from the firm and resell them to the public at a markup. Before the securities may be sold to the public, the firm must publish an SEC-approved prospectus that provides information on the firm's prospects.

Issued securities are traded on the secondary market, that is, on organized stock exchanges, the over-the-counter market, or, for large traders, through direct negotiation. Only members of exchanges may trade on the exchange. Brokerage firms holding seats on the exchange sell their services to individuals, charging commissions for executing trades on their behalf. The NYSE has fairly strict listing requirements. Regional exchanges provide listing opportunities for local firms that do not meet the requirements of the national exchanges.

stocks in exchanges tak.

You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%.

1. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. What is the expected value and standard deviation of the rate of return on his portfolio?

2. Suppose that your risky portfolio includes the following investments in the given proportions:

Stock A Stock B Stock C

What are the investment P

■ of yo1ir client'? overa11 portfo1io including the po-

18. Which indifference curve represents the greatest level of utility that can be achieved by the investor?

19. Which point designates the optimal portfolio of risky assets?

Another new feature in this edition is the inclusion of website addresses. The sites have been chosen for relevance to the chapter and for accuracy so students can easily research and retrieve financial data and information.





The above sites contain information of listing requirements for each of the markets. The

sites also provide substantial data for equities.

— Internet Exercises: E-Investments

These exercises were created to provide students with a structured set of steps to finding financial data on the Internet. Easy-to-

follow instructions and questions are presented so students can utilize what they've learned in class in today's Web-driven world.


Go to: http://momingstar.com. From the home page select the Funds tab. From this lo


cation you can request information on an individual fund. In the dialog box enter the


ticker JANSX, for the Janus Fund, and enter Go. This contains the report information

on the fund. On the left-hand side of the screen are tabs that allow you to view the var

ious components of the report. Using the components of the report answer the follow-

ing questions on the Janus Fund.

Report Component


Morningstar analysis

What is the Morningstar rating? What has been the fund's

year-to-date return?

Total returns

What is the 5- and 10-year return and how does that compare

with the return of the S&P?

Ratings and risk

What is the beta of the fund? What is the mean and standard

deviation of returns? What is the 10-year rating on the fund?


What two sectors weightings are the largest? What percent of

the portfolio assets are in cash?

Nuts and bolts

What is the fund's total expense ratio? Who is the current

manager of the fund and what was his/her start date? How

long has the fund been in operation?

We wrote the first edition of this textbook more than ten years ago. The intervening years have been a period of rapid and profound change in the investments industry. This is due in part to an abundance of newly designed securities, in part to the creation of new trading strategies that would have been impossible without concurrent advances in computer technology, and in part to rapid advances in the theory of investments that have come out of the academic community. In no other field, perhaps, is the transmission of theory to real-world practice as rapid as is now commonplace in the financial industry. These developments place new burdens on practitioners and teachers of investments far beyond what was required only a short while ago.

Investments, Fifth Edition, is intended primarily as a textbook for courses in investment analysis. Our guiding principle has been to present the material in a framework that is organized by a central core of consistent fundamental principles. We make every attempt to strip away unnecessary mathematical and technical detail, and we have concentrated on providing the intuition that may guide students and practitioners as they confront new ideas and challenges in their professional lives.

This text will introduce you to major issues currently of concern to all investors. It can give you the skills to conduct a sophisticated assessment of current issues and debates covered by both the popular media as well as more specialized finance journals. Whether you plan to become an investment professional, or simply a sophisticated individual investor, you will find these skills essential.

Our primary goal is to present material of practical value, but all three of us are active researchers in the science of financial economics and find virtually all of the material in this book to be of great intellectual interest. Fortunately, we think, there is no contradiction in the field of investments between the pursuit of truth and the pursuit of money. Quite the opposite. The capital asset pricing model, the arbitrage pricing model, the efficient markets hypothesis, the option-pricing model, and the other centerpieces of modern financial research are as much intellectually satisfying subjects of scientific inquiry as they are of immense practical importance for the sophisticated investor.

In our effort to link theory to practice, we also have attempted to make our approach consistent with that of the Institute of Chartered Financial Analysts (ICFA), a subsidiary of the Association of Investment Management and Research (AIMR). In addition to fostering research in finance, the AIMR and ICFA administer an education and certification program to candidates seeking the title of Chartered Financial Analyst (CFA). The CFA curriculum represents the consensus of a committee of distinguished scholars and practitioners regarding the core of knowledge required by the investment professional.

There are many features of this text that make it consistent with and relevant to the CFA curriculum. The end-of-chapter problem sets contain questions from past CFA exams, and, for students who will be taking the exam, Appendix B is a useful tool that lists each CFA question in the text and the exam from which it has been taken. Chapter 3 includes excerpts from the "Code of Ethics and Standards of Professional Conduct" of the ICFA. Chapter 26, which discusses investors and the investment process, is modeled after the ICFA outline.

In the Fifth Edition, we have introduced a systematic collection of Excel spreadsheets that give students tools to explore concepts more deeply than was previously possible. These


spreadsheets are available through the World Wide Web, and provide a taste of the sophisticated analytic tools available to professional investors.

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