bindex.qxd 11/2/11 11:29 AM Page 355

Index

Academic , 191, 290, 293 Amis, George, 24–25 Academic macroeconomics, Analyst, functions of, 222–223 210–211 Animal spirits, 287 Accountants, functions of, 222–226 Appraisal price, 128 Accounting practices, reform of, 9, Arbitrage: 194, 223–226 applications, generally,90, 128, Accounting ritual, 222 131, 136–137, 177, 246, Accounting rules, 225, 258 248–249, 256, 260–266, 272, Active management, 59, 62, 135, 289 155 riskless, 265 Active portfolio strategy,67, 112, Arbitrage pricing theory (APT), 92, 271–273 293 Active traders, 249, 252 Arrow,Kenneth, 121 Aggregate capital, 213 Arthur D. Little, Inc. (ADL), Aggressive investment policy,59 accomplishments at, 47, 49–54, Aggressive investors, 95 65, 98–99, 185, 249, 262, 297 Aiken, Howard, 35 Artificial intelligence, 44 Alchemy of finance, 288 Ask price, 110, 250 Allen, Carl, 53http://www.pbookshop.comAsset allocation: Allen, Miriam “Mimi,” see Black, global, 9 Miriam “Mimi”Allen significance of, 107, 271 Allen,Ted,53 Asset allocation model, 271–275 Alpert, Richard,COPYRIGHTED 38 Asset MATERIAL price equilibrium, 195 Alpha, 61, 120 Asset prices/pricing, 81–82, 131, Alpha effect, 106–109, 113, 115 159, 179, 294 American economy,76 Asset returns, 106–107 American Association Asset risk, 259 (AFA), 216, 231, 235, 283 Associates in Finance, 100–101, American Society of Creators, 105–109 Apostles, and Prophets, 24, 30 Assumptions, common, 279–280

355 bindex.qxd 11/2/11 11:29 AM Page 356

■ 356 ■ INDEX

Auctions,T-bill,156 Beating the market, 68, 103, 105, Augenblick, Eva, 24 177, 243 Automated stock exchange, 71 Beat the Market (Thorp/Kassouf), Automated trading system, 247–248 119–120 Average returns, 58 Beaver,William, 224 Awards and recognitions: Behavioral finance, 235 Chorafas Prize, 296 Bell Journal of Economics and Financial Engineer of the Year Management Science, 133 (IAFE), 1, 296 Bernhard,Arnold, 134 Prize (AFA), 283 Bernstein, Bart, 39–40 Fischer Black Research Beta, 105–106, 112–113, 120, Fellowships, University of 126, 292 Chicago, 285 Beta factor, 113–114 Fischer Black Visiting Bid-ask spread, 253 Professorship of Financial Bid price, 110 Economics, MIT,283 Binomial trees, 261 Gordon McKay Fellowship, 35 Black,Alethea, 93, 285–286 National Science Foundation Black,Amy,25 fellowship, 35 Black,Ashley,186 Nobel Prize, 3 Black, Catherine “Cathy”Tawes, 256–258, 275, 294 Bachelier, Louis, 2 Black, Cyril Edwin, 52 Bagehot,Walter, 71 Black, Elizabeth “Libby,”27–28, 40 Balanced growth steady state Black, Ellen Engleman, 26 equilibrium, 192–193, 195 Black, Fischer, generally: Bank Administration Institute, 64 career development, 297 Bank funds management, 160 childhood, 24, 28–30 Bank of England,http://www.pbookshop.com 157 children, relationship with, Bank reserves, 145–148, 156 21, 36, 93, 139, 186–187, 190, Banking industry: 216, 284 characteristics of, 68, 76–77, communication skills, 15–21, 93–95, 122, 138, 146, 148 196–197 finance vs. economic view, computer technology,interest in, 160–161 42–45 Banking principle, 157 creativity,22, 45–46, 211–212, Bankruptcy,82, 146, 260 289 Basis, 111 death of, 281 Basket trading, 249 dissertation, 44 Bear market, 274 divorce(s), 37, 40, 216, 227 bindex.qxd 11/2/11 11:29 AM Page 357

Index ■ 357 ■

educational background, 23–24, Black, Janice Blakeney,29 29–30, 32–35, 51 Black, Louis “Lee” Engelman, 29, 53 engagement(s), 31, 52, 53 Black, Louise Bryson, 26 estate planning, 280–281 Black, Melissa, 139, 187 eulogies, 284–286 Black, Miriam “Mimi”Allen, 53, 65, family background, 25–28 100, 135, 185–186, 256–257 family life, 283 Black, Paige, 190 family relationships, 21, 23, 40, 52, Black, Stanley,25–26 139 Black, Stanley Warren, Jr., 26 filing system, 16, 45 Black-Derman-Toy (BDT) model, friendships, see specific colleagues 9, 261–262, 264–265 health issues, 275–277, 280–281, Black-Jensen-Scholes (BJS), 284 104–106, 113–115 health regime, 11–12 Black-Litterman asset allocation journal writing, 9–10 model, 9, 271–275 Keynes, comparison with, Black Monday,266–267, 289 286–287 Black-Scholes option pricing lifestyle, 11–12, 29–32 formula: marriage/married life, 31–32, applications of, generally,84, 34–37, 53, 64–65, 100, 135, 129–131 185–187, 190, 215–216, 227, development of, 125–130, 244–245 256, 271 Block positioners, 233 memorial services for, 284–286 Blue-chip stocks, 82 personality characteristics, 30, 32, Bogle, Jack, 111 141, 186 Bolt Beranek and Newman (BBN), political views, 38–39, 46, 296 40–41, 43, 47 problem-solving ability,7–8 Bond debt, 260 professional http://www.pbookshop.combackground, 36, Bond investments, 218–219, 39–41, 43, 47 270–271 Sermon on the Mount, 19–20 Bond maturity,262–263 success factors, 15–16 Bond options, pricing, 264 as teacher, 16, 184–185, 196–198 Bond swaps, 9 travel, 101 Book value, 223 video game addiction, 7–8, 243 Borrowing: Black, Fischer Sheffey,25–27 banking industry and, 162 Black, Fischer Sheffey,Jr., see Black, exchange rate system and, 180 Fischer foreign currency and, 173 Black, Fischer Sheffey,III, 37 implications of, generally,94–95, Black, Floyd, 52 143–144, 146 bindex.qxd 11/2/11 11:29 AM Page 358

■ 358 ■ INDEX

Borrowing (continued) Capital, generally: rates, 160 budgeting, 64, 204, 226–228 risk-free, 174 Cambridge capital controversy, riskless, 102, 159, 260–261 213–214 Brady Commission, 267 fluctuation in, 205–206 Breeden, Douglas, 284 structure, 80 Bretton Woods exchange rate system, values, 206–207 166–167, 169–172, 178–179 Capital asset pricing, Ross’s Brewster, Kingman, 59 arbitrage theory of, 92 British pound, 165, 181, 183 Capital asset pricing model British stocks, 183 (CAPM): Brokerage accounts, 63 asset pricing, 131 Broker commission, 110 capital budgeting, 204, 226–228 Brokers, functions of, 70 commodity futures, 168 Bronxville, 23–25 debt and equity,258–260 Bruner, Jerome, 33, 36, 45, 211 development of, 10–11, 72–73, Bryson,Thad, 25 295–297 Bryson City Bank, 26 diversification and, 123, 233 Bundy,McGeorge, 64–65 empirical tests, 104–105 Business credit, 155–156 equilibrium, 177, 287–288, 295 Business cycle, 138 exchange rate system, 180 Business cycle(s): features of, 2–4, 204–205, characteristics of, 71, 81, 96, 98, 292–293 138, 141–142, 144, 200–202, international, 182–183, 272 205, 207, 210, 276–277, 290 Lintner’s, 79–84 stabilization of, 150 publication of, 73–74, 76–77, 84 Business Cycles and Equilibrium risk measurement, 263 (Black), 9–10,http://www.pbookshop.com 275 Sharpe-Lintner, 264 Business expansion, 76 Sharpe’s theory of, 84–87, 91 Business fluctuation, 200–201, 207 statistical applications, 56 Business practices, changes in, 290 theoretical acceptance of, Business risk, 84, 259 108–109 Butters, Keith, 76 Treynor’s, 55–57, 91–92, 126 Buy price, 250 uncertainty and, 287 “weak form” of, 115 California, 39, 101 Capital goods, 205 Call options, 260 Capital investment projects, 58 Canadian dollars, 165 Capital market: Canadian Operational Research characteristics of, 174 Society,51 equilibrium, 102, 152 bindex.qxd 11/2/11 11:29 AM Page 359

Index ■ 359 ■

Carpenter, Cynthia “Tinna,”30–37, Commodities, generally: 40 characteristics of, 143, 150 Cash dividends, 234–235 contracts, 168 Cash flows, 218 futures, 9, 169 Cashless society,162 international trade, 174, 177 Cash-settled futures, 168 options, ban on, 168–169 Cassel, Gustav, 172, 177 prices, 179 Center for Research in Security Commodity Futures Trading Prices (CRSP), 64, 88, 100, Commission, 168, 232 136 Commodity markets, international, Central bank(s), 144–146, 150–151, 174, 177 159–160, 163, 290 Common stock, 102–103, 116 Centralized banking, 155 Competitive markets, 62, 149 Certainty equivalents, 80–81 Computer database, development Charles River Theory of the Firm, of, 88–89 76, 78 Computer system, Chartered financial analysts (CFAs), multiprogrammed, 51 69 Conditional expectations, 228 Charts/charting, 62, 158 Constant leverage portfolio, 125 Chesnut, Mary,27–28 Constant proportion portfolio Chicago Board of Trade (CBOT), insurance (CPPI), 268–269 135–136, 166 Consumption, 204, 269, 276, 278 Chicago Board Options Exchange Continental Bank, 54, 108 (CBOE), 9, 168, 237 Continuous-time finance, 193 Chicago Mercantile Exchange Continuous-time stochastic (CME), 165–167, 169 processes, 121 Chicago School of Economics, Cook, Ransom, 103 149, 151 http://www.pbookshop.comCooley,Dick, 100 Chomsky,Noam, 42, 281 Cootner, Paul, 89, 127 Chorafas Prize, 296 Corporate bondholders, 130 Clark, Elizabeth Peay,27 Corporate liabilities, 2 Class B membership, IMM, 167 Corporation finance, 55 Classical economics, 286 Corzine, Jon, 237, 241, 275, Clinton, Bill and Mary,215–216 283–285 Coefficients, 118 Cost of capital, 55, 78–79 Cognitive power, 45 Covariance, 80–81, 83–84, Coin flips, 62 105–106, 183, 263 Commercial lending/commercial Covariance matrix, 87, 272 loans, 110, 145 Cowles Commission, 151 Commercial paper, 148 Cox, John, 17, 244–247, 283 bindex.qxd 11/2/11 11:29 AM Page 360

■ 360 ■ INDEX

Cox, Oscar, 26 Derivatives, characteristics of, 6, 14, Cox-Ross-Rubinstein, equity 126, 169, 181, 256, 258–260, option valuation, 245, 261 265–267 Crash of 1987, 266 Derman, Emanuel, 8, 261 Creative accounting, 225 Deutsche mark, 165, 251 Credibility,sources of, 239 Dice reasoning, 56 Credit, 144, 146, 155, 157, 159–160 Differential equations, 125–129, 132 Cuneo, Larry,104 Diller, Stanley,238 Currencies, characteristics of, 156, Direct Order Trading (DOT) 159, 165–167 system, 247 Currency principle, 157 Disclosure, importance of, 222, 224 Currency rates, 163 Discounted cash flow,228 Currency risk, 180–182, 271 Discounting rule, 203, 228 Currency trap, 265 Discount rate, 129, 145, 206 Cushion, in constant proportion Disequilibrium, 155 portfolio insurance, 269 Diversifiable risk, 56 Diversification, importance of, 13, Darwinian selection, 14 86, 123–124, 259, 271. See also “Dawn of the Golden Years,”44 Asset allocation “Day Alpha Died,”107–108 Dividend Discount Model, 107 Dealer, functions of, 70–71, 110, Dividend payout, 76 165, 168, 173, 250 Dividends, 77–79, 118 Deal makers, 239 Dividend-tilted index fund, 116 Debits, 146 Dodd, David L., 69 Debt leverage, 76 Domestic income stabilization, 170 Decision-making process, Domestic monetarism, 170 influential factors, 64, 227–228, Domestic money supply,176 244, 271 http://www.pbookshop.comDomestic price level, 179 Deductive question answering Domestic quantity of money,179 system, 44 Domestic stabilization, 172, 174 Deductive reasoning, 44, 191 Dorfman, Robert, 121 Default risk, 162, 260, 263 Douglas, George, 106 Defensive investment policy,59 Dow Jones Industrial Average, 60 Defined benefit plans, 221 Dubno, Michael, 247 Deflation, 146, 179 Dynamic trading strategies, 268, Delta hedge ratio, 268 276, 289 Deposit liability,162 Depreciation, 174–175 Earnings: Deregulation, impact of, 148, accounting practices and, 161–162 224–226 bindex.qxd 11/2/11 11:29 AM Page 361

Index ■ 361 ■

implications of, 72, 79–80, 104, international capital market, 177, 116, 223 182 manipulation of, 258 mean reversion, 270 Econometric models, 71, 142, 211 significance of, 62, 92–94, 97, Econometrics, 117–118, 140–141, 102, 106, 117, 131, 138, 146, 207, 262, 271, 291–294 148, 152, 154, 175, 179, 195, Economic boom, source of, 142, 233, 251–253, 264–265, 267, 145, 155–156, 205 287–288, 290 Economic efficiency,234–235 Equilibrium Model of the Crash, Economic growth: 267–270 historical perspective, 192, 198 Equities, in asset allocation model, implications of, 276–277 273–274 Economic intuition, significance of, Equity market, 57 119–120, 227 Ernst, Martin, 89 Economics, as evolutionary process, Essays on Economic Semantics 73, 289–290 (Machlup), 154 Economist,18 Eurodollar, 168, 171 Efficient frontier, 115 European currencies, 274. See Efficient markets, characteristics of, specific types of currencies 87, 91, 96, 103, 160, 199, 208, Excess returns, 61, 181–182, 242, 223, 264, 292 248, 271 Efficient markets hypothesis Exchange-rate risk, 165–166 (EMH), 61–63, 100, 158 Exchange rate systems, 166–167 Efficient markets portfolio, 104 Exchange rates, international Efficient markets theory,116, 151, monetary system, 172, 174–175 159 Exercise price, 129 Efficient portfolios, 86 Expectations, 79, 228 Electronic orderhttp://www.pbookshop.com book, 233 Expected returns, 10, 13, 62, 82, 96, Elson, Elliot, 32 106, 120, 126–128, 131, 199, Embedded bond option, 260–261 206, 216, 234, 270, 272–273, Empiricism, 111–112, 292–293 289 Employee Retirement Income Exploring general equilibrium, 279 Security Act (ERISA), 218–221 Exploring General Equilibrium Employment rates, 145–146 (Black), 10, 275, 278, 284 Endowment management, 65–69 Endowments, 283 Factor models, 293 Enron, 289 Fahey,Bob, 54, 59–60, 63, 65 Equilibrium: Fama, Eugene, 62–63, 74, 86–92, Fisher’s model of, 143 101, 103, 134, 159, 189, 264, influential factors, 110 292–293 bindex.qxd 11/2/11 11:29 AM Page 362

■ 362 ■ INDEX

Fargo,William, 102 No. 21A, 152 Fat tails, 89, 91 No. 27, 159 Federal funds rate, 111, 161 No. 30, 160 Federal Reserve, 95, 143, 146–148, Financial policy,76, 79, 81 155, 210, 262 Financial reporting, 223–224 Federal Reserve Bank of New Financial risk, 64, 84 York, 294 Financial services, 227, 236 Federal Reserve Board, 267 Fiscal policy,141–142, 152, 170, Fiat gold standard, 178–179, 183 172 50–50 variable call option, 125 Fischer Black Prize (AFA), 283 Fifty Questions course, 185, 198, Fischer Black Visiting Professorship 284 of , MIT, Finance, generally: 283 development of, 14 Fischer, Louis E., 26 perceptions of, 194 Fischer, Marianna, 25–26 theory,233 Fischer, Patrick, 43–44 Financial Accounting Standards Fisher, Irving, 143, 174, 179, Board (FASB), 223–224 200–203, 205, 212 Financial Analysts Federation, 69 Fisher, Lawrence, 64, 88–89 Financial Analysts Journal, 5, 68–72, Fixed exchange rate system, 97, 135, 219–220, 252, 280, 166–167, 170–173, 175 290–291 Fixed income instruments, 218, Financial efficiency,economic 221, 237, 261, 274–275 efficiency distinguished from, Fixed Income Research division, 232–233 Goldman Sachs, 270, 273 Financial Engineer of the Year, Fixed-rate callable debt, 259 IAFE, 296 Flesch, Rudolf, 43 Financial Notes: http://www.pbookshop.comFlexible exchange rate system, 166, chronology,299–300 171, 173, 175 No. 1, 64 Floating-rate debt, 259 No. 2, 64, 204, 227 Floor value, 269 No. 3, 66 Flow trading, 251, 254 No. 6, 68, 125, 269 FMP model (Federal Reserve, MIT, No. 6B, 122 and University of No. 7, 68, 93 Pennsylvania), 143 No. 7A, 146 Ford Foundation, 64–69, 99–100, No. 8, 93, 201, 204 139, 185 No. 15, 108 Forecasting, 104, 194 No. 17, 159 Foreign currency exposure, 181 No. 17A, 138, 148 Foreign investment, 71 bindex.qxd 11/2/11 11:29 AM Page 363

Index ■ 363 ■

Formalism, 291, 293 Gold, 167, 171, 173–174 Forward contracts, 168 Gold currency,178 Forward exchange markets, 173 Gold inventories, 179 401(k) plan, 221 Goldman Sachs: Fouse, Bill, 107, 109 accomplishments at, generally,7, Fractured market, 267 10, 12, 43, 45, 102, 118, 159, Free market, 153 163, 169, 181, 216–217, 221, Frenkel, Jacob, 169 238, 240–242, 288–289 Friedman, Milton, 74, 138, 141, Asset Management (GSAM), 148–151, 155, 157–159, 238–239, 271, 273, 276 166–167, 168, 170–172, 174, automated trading system, 179, 190, 208 247–248 Friedman, Stephen, 260, 274–275 Fixed Income division, risk Friendships, 21, 24–25, 34, 39–41 arbitrage, 260–266, 274 Fullarton, John, 156–157 Japan expansion, 239 Fundamental discovery,8–9 move to, 236 Fundamental trading strategies, 243 portfolio insurance, 268–269 Future cash flow,226–228 ThinkTank, 241–242 Future earnings, 80 Vice President of Trading and Future income, 202–203, 206 Arbitrage, 231–232 Futures contracts, 166, 168, 247 Gold standard, 176–180 Futures markets, 166–169 Gordon McKay Fellowship, 35 Futures-type market, 135 Government currency,156 Government inventories, 178 Gamble/gambling, 80, 168 Government regulation, 153, Gaussian random walk, 90 160–161, 267. See also Federal Geertz, Clifford, 33–34 Reserve; Securities and General equilibriumhttp://www.pbookshop.com model, Exchange Commission (SEC) 194–195, 201, 207, 279 Graham, Benjamin, 69 General equilibrium theory,172, Graham and Dodd Scroll, 69 192, 195, 255–258 Great Depression, 142, 265, 290 German bond market, 272 Griliches, Zvi, 121 Glaeser, Ed, 281 Growth, economic, see Economic Glass-Steagall Act, 161 growth Glasser, Peter, 219–220 Growth rate, 96 Global asset allocation, 9 Global bond portfolio, 271–272 Haberler, Gottfried, 173 Globalization, impact of, 10 Hansen,Alvin, 141 “Glossary for Finance” (Black), Harvard Business School, 74–75 197, 277 Harvard College, 23, 31–35 bindex.qxd 11/2/11 11:29 AM Page 364

■ 364 ■ INDEX

Harvard University,35–39 INFOR,51 Hayek, Friedrich von, 149, 154, Information content, in trading 200, 209, 216 process, 246–249 Hedge fund, 106–107 Information-based traders, Hedge ratio, 128, 183, 268 functions of, 232, 243, 249–251 Hedge strategies/hedging, 132, Innovation-oriented stocks, 59 136, 167, 173, 180–182, 256, Institutional investors, 59–64, 260, 264–265, 271, 274 70–71, 181, 268 Helmreich, Robert, 24 Institute of Chartered Financial High-beta stocks, 105–107, 113 Analysts, 69 High-dividend stocks, 117 Insurance companies, 77, 79 Hilbert, David, 192, 195 Intellectual curiosity,6 Historical returns, 289 Intellectual risk, 12 History of Banking Theory Interbank forward market, 168 (Mints), 155 Interbank market, 167 Houthakker, Hendrik, 121 Interest equalization tax, 171 Huang, H. S., 245 Interest rate futures, 9, 168 Human capital, 203–204, 212, Interest rate risk, 259, 263–264 277–280 Interest rates, impact of, 68, 78, 80, Humphrey,Thomas, 156 94, 101, 110–111, 122, 129, Hyperinflation, 156 138, 143, 145–146, 149, 159–161, 163, 204, 260, 263, Ibbotson, Roger, 136 265–266, 280, 290 Illiquid markets, 243 Internal funds, distribution of, 77 Image-Plan cognitive-behavioral Internal Revenue Service (IRS), framework, 36 256, 258 Income level, 158 International arbitrage, 177 Incomplete markethttp://www.pbookshop.com portfolio, 115 International Association of Financial Independent risk, 96 Engineers (IAFE), 1, 4, 296 Index funds, 106–107, 109, 259 International banks, 167 Index futures, 181 International capital market Index mutual funds, 94 equilibrium, 175, 182 Index trader, functions of, 110 International CAPM, 272 Indexed limit order, 253 International Commerce Individual investors, 92, 94 Exchange, 166 Industrial Management Review, 120 International economic system, Industry-specific risk, 106 174 Inefficient markets, 66–68, 90, 295 International equilibrium, 177 Inflation, 142, 146, 156, 162–163, International investment, 175, 181 174, 176, 199–200, 213 International monetarism, 170 bindex.qxd 11/2/11 11:29 AM Page 365

Index ■ 365 ■

International Monetary Fund Jervis, Steven, 32 (IMF), 169, 171 Johnson, Harry,169, 172 International Monetary Market Jones, Rob, 266, 268 (IMM), 165–168 International monetary system, 174 Kendall, M. G., 62 International price index, 174 Keynes, John Maynard, 143, 196, International reserves, 169–171, 200–201, 286–287 176 Keynesian approach, 159, 170, 176, International trade, 172 290 International Trade,Workshop in, Keynesian economics, 9, 141–142, 169 148–149 Intrinsic value, 70 Keynesian-monetarist debate, 170 Intuition, significance of, 115 Keynesian orthodoxy,159 Investment banking, 236 Keynesianism, 81, 153–154, Investment Company Act of 1940, 209–210, 293 60 Kindleberger, Charles, 170 Investment Company Amendments King, Benjamin, 87–89, 103 Act of 1967, 60 Kirova, Zarafinca, 52 Investment Company Institute Kluckhohn, Clyde, 33 (ICI), 60, 63–64 Kritzman, Mark, 5 Investment decisions, 64, 227–228 Kuh, Edwin, 76–77 Investment funds, performance Kydland, Finn, 210–211 evaluation, 58 Investment policy,71 Lacey,John, 21 Investment spending, 77 Laffer,Arthur, 159 Irrational Exuberance (Shiller), 206 Laughlin, J. Laurence, 155–157 Irrationality,286–287 Law of one equilibrium, 177 Ise, John, 75 http://www.pbookshop.comLearning process, 8 Italian lira, 165 Leary,Timothy,38 Least squares, 90 Japanese stocks, 183 Leland, O’Brien, Rubinstein Japanese yen, 165 Associates (LOR), 268 J.Aron, 236 Lending: Jensen, Michael: banking industry and, 162 CAPM, 104 characteristics of, 94–95, 143–144 modern finance theory,134 exchange rate system and, 180 mutual funds performance, foreign currency and, 173 60–61, 63 risk-free, 174 portfolio evaluation, 66 riskless, 102, 159, 261 relationship with, 93, 99–101, 264 Leontief,Wassily,121 bindex.qxd 11/2/11 11:29 AM Page 366

■ 366 ■ INDEX

Leverage, generally, McAvoy,Paul, 133 cost of, 10, 79, 94, 102, 106, 110, McCloskey,Donald N., 176 114–115, 219 McDonough,William J., 294 impact of, 127 Machlup, Fritz, 148, 153, 172 ratio, 109 McKean, Henry,120 Leveraged long/short portfolio, 107 McQuown, John “Mac,”100, Leveraged low-risk decile portfolio, 102–103, 105, 109 107–108 Macroeconomics: Leveraged market portfolio, academic, 210–211 107–108 characteristics of, 9, 68, 98, 117, Liability risk, 259 141, 148–149, 151–154, 158, Licklider, J. C. R., 41–42 201, 276, 290 Limit orders, 253 new classical, 208 Linear regression, 117–118 traditional, 207–208, 210 Lintner, John, 2–3, 55, 74–78, “Magical Number Seven,The” 80–84, 92, 106, 130, 141–142 (G. Miller), 45 Liquidity,168, 234, 250, 264, 266 Management style, impact of, 58–59 Liquidity preference, 56 Man-computer symbiosis, 45–46 Liquid markets, 244 Mandelbrot, Benoit, 89–91 Litterman, Bob, 183, 270–275 Mandelbrot hypothesis, 90 Live cattle, 166 Man-made risks, 259 Long position(s), 137, 243, 248, Margin calls, 267 260 Marill,Tom,42 Long/short portfolio, 115 Market capitalization, 183 Long-term contracts, 13 Market efficiency,106 Long-Term Capital Management Market equilibrium, 10, 56, 83, 86. (LTCM), 283, 293–295 See also Equilibrium Lorie, James, 64–66,http://www.pbookshop.com 68, 87–88, 101, Market exposure, 95 103, 135, 138, 157, 184, Market factor, 87 186–187, 189 Market liquidity,168 Loss,Alan, 53 Market makers, 110, 233 Low-beta funds, 116 Market orders, 253 Low-beta portfolio, 109 Market prices, 137–138, 288, 292 Low-beta stocks, 106, 110, 112–113 Market psychology,267 Low-dividend stocks, 117 Market risk, 58, 61, 84, 96, 106, Low-risk decile portfolio strategy, 126, 128 107 Market sensitivity,85 Low-risk stocks, 107 Market timing, 55 Lucas, Robert, 208–209, 278–279 Market values, 55, 224 bindex.qxd 11/2/11 11:29 AM Page 367

Index ■ 367 ■

Markowitz, Harry,7, 61, 69, 73–74, Minsky,Marvin, 35, 43 80–81, 85, 151, 272 Mints, Lloyd, 155 Massachusetts Investors Trust, 100 Mises, Ludwig von, 153–154 Mathematical modeling, 292, 294 Mispricing, 136, 236, 273 Maturity,261. See also Bond Modern credit economy,154 maturity Modern finance theory,6, 15, 138, Maximum likelihood, 90 222 Mean reversion, 270, 276 Modern portfolio theory,104, 272, Melamed, Leo, 165–169 274 Mentor, see Miller, Merton; Modigliani, Franco, 2–3, 17, 55–56, Treynor, Jack 74, 79–84, 122, 141–145, Meriwether, John, 237, 293 173–174, 189–190, 193, 206, Merrill Lynch, 88, 249 262 Merton, Robert C.: Molodovsky,Nicholas, 69 awards and recognitions, 293 Monetarism, 9, 175–176, 210, 290 CAPM, 131–132 Monetarism Mark I/Mark II, 208, continuous time finance, 193 293 at Long-Term Capital Monetary Approach to the Balance of Management, 283, 293–294 Payments,The relationship with, 17, 189, 216, (Frenkel/Johnson), 169 231, 275, 284–285 Monetary expansion, 149 and Samuelson, 119, 121, 125–126 Monetary policy,138, 142, 145, warrants, 121–122, 125 148–149, 152, 153, 162, 170, Merton, Robert K., 119 172, 174 MetLife, 51 Monetary reform, international, Mexican pesos, 165, 168 173 Meyer, John R., 76–77 Monetary theory,93, 122, 146, Miller, George,http://www.pbookshop.com 36, 45 154–155 Miller, Merton: Monetary Workshop, 157, 209 awards and recognitions, Nobel Money illusion, 144 Prize, 73–74 Money issue, 150 CAPM, 74, 79–84, 87–88, 91, 99, Money market, 111 105, 151–153, 193 Money spread trades, 244 macroeconomics, 158–159 Money supply,95, 144–146, on regulation, 258–259 147–148, 156, 158, 172, 176, relationship with, 101, 105, 180 130–131, 134, 162, 184, 189, 285 Money theory,68, 98 as teacher, 99 Money wars, 139 trading strategies, 55, 139–140, 168 Monopoly,97 bindex.qxd 11/2/11 11:29 AM Page 368

■ 368 ■ INDEX

Mont Pelerin Society,148–149, 154 Nonconformity,7 Mortgages, 161 Null hypothesis, 61, 63, 113 Mundell, Robert, 169, 170–172 Mutual funds: O’Brien, Mike, 274 characteristics of, generally,12, Oettinger,Anthony,37–38 63, 70, 93, 111, 113, 177 One-factor market model, 85–87 management practices, 84 On the Regulation of Currencies performance evaluation, 58–61, (Fullarton), 156 63–64 Option pricing theory,2, 239. See transaction costs, 252 also Black-Scholes option Myers, Stewart, 189, 193 pricing formula Options, see specific types of options National accounting systems, 178 characteristics of, 14, 93, 71, 102, National banks, 161 126–127, 136 National Bureau, 158 interest rates as, 280 National capital markets, 179 overpriced, 137, 244 National central banks, 178 pricing strategies, 2, 133–134 National Science Foundation rational pricing theory,2 fellowship, 35 Organizational culture, 47 Natural language, 43 Outperforming stocks, 104 Neoclassical growth model, 277 Over-the-counter options, 136 Neo-Keynesian approach, 200 Overpriced assets, 236 Neo-Keynesian monetary theory, Overpriced bonds, 271 154 Overpriced stocks, 105 Neo-Keynesian troika, 190–191, 196 Overweighting portfolios, 271 New classical macroeconomics, 208 Newell,Alan, 36 Parable of the Blacksmiths/Parable Newsletter(s): http://www.pbookshop.comof the Horses, 70–71 chronology of, 301–302 Paretian price distributions, 91 as information resources, 217, 227 Paretian return distributions, 91 New York Stock Exchange, 88, 109, Participating buy orders/ 266 participating sell orders, 233 Noakes, Shirley,41 Partnership, with Jack Treynor, No-arbitrage approach, 132–133 71–72 No-inventory fiat gold standard Passive management, 59, 135 system, 179 Passive monetary policy,155 Noise, 231–232 Passive money,179–180 Noise traders, functions of, 232–236 Passive portfolio strategy,66–67, Nominal exchange rate, 179 105, 112, 271–273 bindex.qxd 11/2/11 11:29 AM Page 369

Index ■ 369 ■

Passive traders, 252 Probability distribution, 62 Pension assets, management Procognitive system, 42 strategies, 220–221 Production, 204–205, 278 Pension Benefit Guaranty Pro forma earnings statements, 228 Corporation (PBGC), 218 Profit, generally: Pension funds, 9, 59, 64, 70, 77, 79, influential factors, 76–77, 79 268, 289 maximization, 143, 191, 202, 204 Pension liabilities, 194, 217–222 stream, 81 Performance measurement, 58, 60, Program trades, 267 61, 66–68, 107, 112, 271–272 Proprietary trading, 251 Physical capital, 279–280 Prudent man standard, 220 Pinkus, Scott, 270–272 Psychology,33, 36, 45, 235, Pork bellies, 166 243–246, 257 Portfolio diversification, 10, 56–58, Publications: 82, 218, 233, 271 Business Cycles and Equilibrium, Portfolio insurance, 268–270, 289 9–10, 275 Portfolio management, 59, 61–62, Exploring General Equilibrium, 112. See also Management style 10, 275, 278, 284 Portfolio performance, newsletters, 217, 227 measurement of, 66 scientific papers, 283–284 Portfolio selection, 4, 68, 74 Purchasing power parity (PPP), Portfolio Selection: Efficient 172, 177 Diversification of Investments Pusey,Nathan, 38 (Markowitz), 74 Put options, 268 Portfolio test method, 117 Portfolio weights, 86 Quadratic programming, 74 Posner, Richard, 162 Quantitative analysis, 103 Powers, Mark,http://www.pbookshop.com 167 Quantitative finance, 239–240 Pratt-Raiffa-Schlaifer decision Quantitative trading strategies, 243 theory,83 Quantity theory of money, Preferred Habitat Theory,263 158–159, 179 Prescott, Edward, 210–211 Question Answering System, Present capital, 202–203 42–44 Present value, 58, 228 Quine,Van,112, 117–118, 147, 213 Price changes, 62, 87 Price-earnings ratio, 223 Raiffa, Howard, 82–83 Price level(s), 158–159, 172, 176, 180 RAND Corporation, 36, 39, 85 Price of risk, 95 Random Character of Stock Market Prime rate, 110–111 Prices,The (Cootner), 127 bindex.qxd 11/2/11 11:29 AM Page 370

■ 370 ■ INDEX

Random walk theory,62–63, 71, 89 tolerance, 10, 12, 79–80, 94, Rate of interest, 205 96–97, 124–125, 170, 196, Rate of return, 129, 196 267–268, 287 Rational choice theory,12 Risk/return trade-off, 82, 85, 181 Rational expectations theories, 159, Risk-adjusted returns, 53, 58, 263, 208–209 289 Rational option pricing, 2, 132 Risk-free rate, 78, 80, 105, 110, Real bills doctrine, 155–156 114, 146, 174, 204, 206, 228 Real business cycle (RBC), Riskless assets, 263 210–211, 215, 276–278 Riskless borrowing/lending, 94 Recalcitrant experience, 117 Riskless debt, 93–95 Recession, 81, 142, 145, 155–156, Riskless rate of interest, 131, 176, 198, 205, 220 261 Refinancing, 260 Roberts, Harry,62, 89 Reflux doctrine, 156–157 Roll, Richard, 101, 108–109, 264 Regan, Donald, 68 Ross, Stephen, 17, 92, 133–134, Reisman, Karl, 34 245–246, 293 Replicating portfolio, 132 Rubin, Robert, 216, 227, 236–237, Repurchase agreement, 111 240, 246, 248, 254, 260–261, Research methodologies, 291–292, 274 296–297 Rubinstein, Mark, 245–247 Return on capital, 206 Returns, influential factors, 86 Salomon Brothers, 237, 293 Review of Economics and Statistics, 76, Samsonite portfolio, 109–110 122 Samuelson, Paul, 1–3, 63–64, 91, Ricketts, Joseph “Cappy,”30 119–121, 125, 133, 190–192, Risk, generally: 208, 275 arbitrage, 236, 260–266,http://www.pbookshop.com 272 Samuelson-Merton approach, assets, valuation of, 80 125–126 aversion, 79–80, 174, 289 S&P 500 Fund, 109, 111 control, 274, 287 Schlaifer, Robert, 82–83 equity,93, 95–96 Scholes, Myron: exposure, 10, 13, 58, 61, 93, 137, Black, Fischer, friendship with, 180, 204, 264, 271, 287 99–102, 117, 264, 285 hedging of, 259 dissertation, 100 management strategies, 10–11, educational background, 99 55, 105 Long-Term Capital Management premium, 57, 78, 80–81, 92, 206, (LTCM), 293–294 228, 270 options pricing, 127–130 bindex.qxd 11/2/11 11:29 AM Page 371

Index ■ 371 ■

Schwinger, Julian, 35 Smith,Adam, 286–287 Scientific enterprise, 7–9 Smithsonian Agreement, 167 Sectoral disaggregation, 278 Social relations, 33–34 Securities and Exchange Sohmen, Egon, 172 Commission (SEC), 60, 135–136 Solow,Robert, 17, 190, 192–193, Securities Industry Automation 210 Corporation (SIAC), 247 Soros, George, 287, 288 Security analysis: Special Drawing Rights (IMF), benefits of, 66–69, 271–272 171 traditional, 4 Specialists, 233 Security Analysis (Graham/Dodd), Specialization, 13 69 Specific risk, 85 Selling pressure, 269 Spectral analysis, 90 Sell orders, 267 Speculation, 81, 138, 166, 172, Separation theorem, 83 233–234, 259, 262–263, Sermon on the Mount, 19–20 286–287 Sharpe,William, 2–3, 61, 66, 71, Speculative arbitrage, 128 73–74, 84–87, 92 Speculative credit, 155 Sharpe-Lintner CAPM, 264 Speculators, characteristics of, 103, Sharpe ratio, 61 166 Shefrin, Hersh, 234–235 Spot market, 173 Shiller, Robert, 206, 292 Spot money rate, 111 Short positions, 137, 243, 260, Sprenkle, Case, 127, 128–129 272 Stabilization policy,149, 170 Short sales, 266 Stagecoach Fund, 103, 105, Short-term contracts, 13 107–111, 116, 175, 198–202, Short-term securities, 12, 102, 288 110 http://www.pbookshop.comStagflation, 198–200 Shuch,Alan, 239 Standard & Poor’s 500 index, 87, Siegel, Jeremy,182 109, 169, 199, 248 Siegel’s paradox, 182 Standard Oil, 104 Sigma risk, 121 Statistical analyses, 291 Silver, Ed, 51, 53 Statistical decision theory,82–83 Simon, Herbert, 36 Statistical hypothesis testing, 113 Single-currency world, 181 Statistics, applications of, 62–63, 67, Single-factor “diagonal” model, 92 87, 89 Skinner, B. F.,36 Statman, Meir, 234–235 Sloan School at MIT,130–131, Stickells, Stephen, 225 189–192 Stigler, George, 149 bindex.qxd 11/2/11 11:29 AM Page 372

■ 372 ■ INDEX

Stochastic processes, 121, 261 Total risk, 84 Stock exchange, computerized, 71, Toy,Bill, 261 102, 247–248 Trade cycle theory,209 Stock market crash, 266–270, Trading, generally: 275–276, 289 at Goldman Sachs, 236 Stock price(s): congestion, 267 fluctuation in, 87 costs, 109–110, 269 fundamental value, 206 Traditional stocks, 59 implications of, 79, 84 Transaction costs, 247, 252 volatility and, 206 Treasury bills, 107, 115, 148, 156, Stock ratings, 116 168, 199, 221, 262 Stock selection, 62, 103 Treasury bonds, 115, 262 Stone, James M., 232, 234, 236 Treynor, Jack: Supply and demand, 94–95, 141, as active trader, 249–250 148–149, 167, 174–176, 253 capital asset pricing model Swaps, 181, 256, 265 (CAPM), 56–57, 295–296 Swiss francs, 165 capital budgeting, 226–228 Syndication, 259 CAPM generalization, Systematic risk, 57, 92, 114 194–195 career development, 249 Tax arbitrage, 256 Financial Analysts Journal, 68–69, Taxation: 135 business expansion and, 76 as mentor, 52, 217, 285, 295 exchange rate system, 175 pension liability,218–219, 222 impact of, 77, 102, 152 on security analysis, 271 interest equalization tax, 171 trading strategies, 1–6, 21, 54–57, Technical trading strategies, 243 60, 66–67, 74–75, 92, 110, 126, Technological advances,http://www.pbookshop.com impact of, 133 69–70, 193, 203, 210–211, Turnover rate, 67 237–238, 280 Two-factor statistical model, 115 Term structure, 261, 265–266 Two-sector model, 157 Theory of Interest,The (Fisher), 80, 143 Ultimate customer, 70 Theory of investment, 55 Uncertainty,84, 92–93, 116, 121, ThinkTank, 241–242 123, 152, 181, 196, 200–201, Tight Prior Equilibrium, 149 204, 244, 262, 269, 273, 277, Time diversification, 68, 122–124 287–288, 291 Time horizon, 262 Unconditional expectations, 228 Tobin,James, 56, 61, 69, 208–209 Underpriced assets, 236 bindex.qxd 11/2/11 11:29 AM Page 373

Index ■ 373 ■

Underpriced bonds, 271 Variance, 106, 115 Underpriced options, 135, 244 Volatility,impact of, 14, 58, 137, Underpriced stocks, 105–106 182–183, 199, 206, 261, Underweighting bonds, 271 267–269, 276, 288, 292 Underwriters, functions of, Volcker, Paul, 210 227 Unemployment rates, 145–146, Wage income, riskiness of, 13 151, 199–200, 205, 211 Wagner,Wayne, 104 Unified market, 267 Walras,Leon, 192 U.S. dollar, 170–171, 173–174, 183, Warrants, 93, 120–122, 125–127, 251 130–131 U.S.Treasuries, 260, 274 Water walkers, 103 Universal hedging, 183–184, Watkins,Frances Marshall, 272 52–53 Universal Hedging Formula, Wealth: 181–182, 271 value of, 212 , compared worldview of, 202–204 with MIT,189–193. See also Wecker, Jeff, 246–249 Miller, Merton Weighting,portfolio, 273–274 Unobservables, 270 Wells,Henry,102 Upticks, 266 Wells Fargo: Upton, Charles, 151–152, 158 CAPM tests, 104–105 Utility,maximization of, 191, 202, consulting for, 101–102, 140 204 historical perspective, 100, 102–103 Valuation,80, 127, 130–131, 223 McQuown, John, contributions Value at risk, 294–295 to, 103–104 Value-based traders/trading,http://www.pbookshop.comStagecoach Fund, 103, 105, 249–250, 253, 295 107–111, 116, 175, 288 Value Line, 116, 223 Williams, John H., 141 Value Line futures contracts, Winkelman, Mark, 237, 240, 247–248 241 Value Line Investment Survey, Woodford, Michael, 162 134–135 World capital flows, 170 Value Line ranking system,72 World central bank policy,175 Value-weighted market portfolio, World market portfolio, ideal, 105 182 Vanguard 500 Fund, 111 World money supply,170 Variable option, 125 World trade, 171–172 bindex.qxd 11/2/11 11:29 AM Page 374

■ 374 ■ INDEX

World without money,174 Zemp,Albertus “Bertie” Moore Write/writing options, 137, 256 Lenoir, 27 Zemp, Elizabeth (Libby), Yale University,56–59, 66 27–28 Yield curve, 261 Zemp, James Blakeney,27 Zero-beta portfolio, 114–115 Zecher, J. Richard, 176 Zero-beta stock, 129, 131 Zellner,Arnold, 141 Zero reserves, 178

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