Appendix 1: transaction costs

Commission

Commission is charged on purchases and sales of government and corporate securities and of financial futures and options. There are no minimum commissions: rates are negotiable between the client and the broker, with the average size of the transactions and the frequency of trading being taken into consideration. Commission are expressed as a percentage of the value of the transaction and do not currently attract Value Added Tax. Typical commissions on ordinary share purchases and sales are 1 %-l.S% for transactions of below £5,000 in value falling to O.S% for transactions of over £10,000 and 0.2% for institutional-size trades. Typical commissions on gilt purchases and sales are O.S%-1% for transactions of below £5,000 falling to 0.2% for over £20,000 and no commissions are payable for transactions in excess of £1,000,000 in value. Notice that the gilts can be purchased from the National Savings Register via the post office. Transaction costs here are fixed at SOp per £125 in value (with a £1 minimum) for purchases and sales. Typical commissions on futures and options transactions might be 2.S% for purchases worth up to £5,000 with no commission being charged on sales. How• ever, for larger value transactions, commissions would be quoted as an amount in pounds per contract, typically £10-£20 for both a purchase and sale, known as a 'round trip', depending on the particular contract.

Stamp duty

Transfer stamp duty is payable by the purchaser of UK-registered securities (whether or not listed on the ) which require completion of a transfer form. This Stamp duty is payable at the rate of SOp per £100 of considera• tion or part thereof. Purchases of bearer securities are exempt. Also pension funds and charities are exempt from payment of transfer stamp duty. 415 416 Appendix 1: Transaction Costs

Once the Stock Exchange has changed to a rolling1 rather than account settle• ment system for listed securities, purchases of these securities will no longer attract transfer stamp duty. Transactions in futures and options do not attract transfer stamp duty.

PTM levy

A levy (currently lOp) is charged on all purchases and sales of UK equities listed on the Stock Exchange or the Unlisted Securities Market where the consideration is in excess of £5,000. This levy is used to finance the panel on Takeovers and Mergers.

Clearing charges

Buyers and sellers of futures or options contracts are also liable to clearing charges which compensate the broker for clearing charges paid by the broker to the clearing house. The current contract clearing charge imposed on their clients by brokers is around f2 per contract.

FSA charge

Brokers have to comply with regulations laid out by the Financial Services Act 1986. For example, they have to sign a contract with each client detailing their terms and conditions of service and also have to ensure that their clients are aware of the risks of their investments. Some brokers include a charge for this on every contract note. Although the term 'FSA charge' may sound compulsory, this is not the case since it is up to the individual broker as to whether or not he chooses to pass on the costs of complying with regulation.

1 A rolling settlement system is one in which settlement takes place a fixed number of days (usually 1 to 7) after a transaction has occurred. Appendix 2: annuity and present value tables

417 ..... 00""" Present value of 1 at compound interest: (1 + r)-n Years Interest rates (r) (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 1 2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561 2 3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 0.6931 0.6750 0.6575 3 4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718 4 5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.5428 0.5194 0.4972 5 6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.4803 0.4556 0.4323 6 7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.4251 0.3996 0.3759 7 8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.3762 0.3506 0.3269 8 9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.3329 0.3075 0.2843 9 10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.2946 0.2697 0.2472 10 11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.2607 0.2366 0.2149 11 12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2858 0.2567 0.2307 0.2076 0.1869 12 13 o.8787 o.mo o.681o o.6006 o.s3o3 o.4688 o.41so 0.3677 0.3262 0.2897 0.2575 0.2292 0.2042 0.1821 0.1625 13 14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2320 0.2046 0.1807 0.1597 0.1413 14 15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.2090 0.1827 0.1599 0.1401 0.1229 15 16 0.8528 0.7284 0.6232 0.5339 0.4581 0.3936 0.3387 0.2919 6.2519 0.2176 0.1883 0.1631 0.1415 0.1229 0.1069 16 17 0.8444 0.7142 0.6050 0.5134 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1696 0.1456 0.1252 0.1078 0.0929 17 18 0.8360 0.7002 0.5874 0.4936 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1528 0.1300 0.1108 0.0946 0.0808 18 19 0.8277 0.6864 0.5703 0.4746 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1377 0.1161 0.0981 0.0829 0.0703 19 20 0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1240 0.1037 0.0868 0.0728 0.0611 20 25 0.7795 0.6095 0.4776 0.3751 0.2953 0.2330 0.1842 0.1460 0.1160 0.0923 0.0736 0.0588 0.0471 0.0378 0.0304 25 30 0.7419 0.5521 0.4120 0.3083 0.2314 0.1741 0.1314 0.0994 0.0754 0.0573 0.0437 0.0334 0.0256 0.0196 0.0151 30 35 0.7059 0.5000 0.3554 0.2534 0.1813 0.1301 0.0937 0.0676 0.0490 0.0356 0.0259 0.0189 0.0139 0.0102 0.0075 35 40 0.6717 0.4529 0.3066 0.2083 0.1420 0.0972 0.0668 0.0460 0.0318 0.0221 0.0154 0.0107 0.0075 0.0053 0.0037 40 45 0.6391 0.4102 0.2644 0.1712 0.1113 0.0727 0.0476 0.0313 0.0207 0.0137 0.0091 0.0061 0.0041 0.0027 0.0019 45 50 0.6080 0.3715 0.2281 0.1407 0.0872 0.0543 0.0339 0.0213 0.0134 0.0085 0.0054 0.0035 0.0022 0.0014 0.0009 50 ~ \0

-

5 6 7

9 8 2 1

3

4

12 35 14 15 16 17 50

19 20 25

10 11 40 30 45 13

18

0.2693

0.0001 0.0558 30 0.0429 0.0330 0.0000 0.7692 0.0254 0.5917 0.0195 0.4552 0.0150 0.3501 0.0116 0.0089 0.0068 0.2072 0.0053 0.1594 0.1226 0.0014 0.0943 0.0725 0.0004 0.0000

0.0000

publishers.

0.0001 0.0607 0.0471 0.0365 0.7752 0.0283 0.6009 0.0219 0.4658 0.0170 0.3611 0.0132 0.2799 0.0102 0.0079 0.2170 0.0061 0.1682 0.1304 0.0017 0.1011 0.0784 0.0005 0.0000 0.0000 0.0000

the

of

0.2910

28 29 0.0002 0.0662 0.0001 0.0517 0.0404 0.0000 0.7812 0.0316 0.0000 0.6104 0.0247 0.4768 0.0193 0.3725 0.0150 0.0118 0.0092 0.2274 0.0072 0.1776 0.1388 0.0021 0.1084 0.0847 0.0006

permission

0.0568

0.7874 0.0352 0.4882 0.0172 0.3027 0.0107 0.2383 0.0084 0.1877 0.1478 27 0.0025 0.1164 0.0916 0.0002 0.0721 0.0001 0.0447 0.0000 0.0000 0.6200 0.0277 0.0218 0.3844 0.0135

0.0008

By

(1980).

0.0197 0.3149 0.2499 0.0124 0.1574 26 0.0031 0.0992 0.0003 0.0787 0.0001 0.0625 0.0496 0.0000 0.7937 0.0393 0.0000 0.6299 0.0312 0.4999 0.0248 0.3968 0.0156 0.0098 0.1983

0.1249 0.0010

Reinhold

0.0225 0.3277 0.2621 0.0144 0.1678 25 0.0038 0.1074 0.0004 0.0859 0.0001 0.0687 0.0550 0.0000 0.8000 0.0440 0.0000 0.6400 0.0352 0.5120 0.0281 0.4096 0.0180 0.0115 0.2097

0.1342 0.0012

0.0005

0.0757

0.8065 0.0492 0.0000 0.5245 0.0258 0.3411 0.0208 0.0168 0.2751 0.0135 0.2218 0.1789 24 0.0046 0.1443 0.1164 0.0016 0.0938 0.0002 0.0610 0.0001

0.6504 0.0397 0.0320 0.4230

Nostrand

Van

0.0007

0.0000

0.0296 0.3552 0.0241 0.0196 0.2888 0.0159 0.2348 0.1909 23 0.0057 0.1552 0.1262 0.0020 0.1026 0.0003 0.0834 0.0678 0.0001 0.8130 0.0551 0.6610 0.0448 0.5374 0.0364 0.4369

edn,

3rd

0.0009 0.1122 0.0004 0.0920 0.0754 0.0001 0.8197 0.0618 0.0000 0.0507 0.5507 0.0340 0.3700 0.0279 0.0229 0.3033 0.0187 0.2486 22 0.2038 0.0069 0.1670 0.1369 0.0026

0.6719 0.0415 0.4514

Finance,

0.0013 0.1228 0.0005 0.1015 0.0002 0.8264 0.0693 0.0001 0.0573 0.5645 0.0474 0.4665 0.0391 0.3855 0.0323 0.0267 0.3186 0.0221 0.2633 0.2176 21 0.0085 0.1799 0.1486 0.0033

0.0839

0.6830

Company

of

0.0017 0.0007 0.0003 0.0779 0.0001 0.5787 0.0451 0.4019 0.0376 0.0313 0.3349 0.0261 0.2791 20 0.2326 0.0105 0.1938 0.1615 0.0042 0.1346 0.1122 0.0935 0.8333 0.6944 0.0649 0.0541 0.4823

0.0023 0.0010

0.0002

0.0520 0.0437 0.0367 0.0308 0.2487 0.0129 0.1756 0.0054 0.1476 0.1240 0.1042 0.0004 0.8403 0.0876 0.7062 0.0736 0.5934 0.0618 0.4987 0.4190 0.3521 0.2959

0.2090 19

Management

0.0030 0.0013

0.0003

0.0600 0.0508 0.0431 0.0365 0.2660 0.0160 0.2255 0.1911 0.0070 0.1619 0.1372 0.1163 0.0006 0.8475 0.0985 0.7182 0.0835 0.6086 0.0708 0.5158 0.4371 0.3704 0.3139

Wilkes,

and

0.2080 0.0041 0.1778 0.0019 0.1520 0.1299 0.0009 0.8547 0.0004 0.0949 0.6244 0.5337 0.4561 0.0693 0.0592 0.3898 0.0506 0.3332 0.0433 0.2848 0.0197 0.2434 0.0090

0.1110 0.7305 0.0811

Samuels

0.0055 0.0026 0.0013 0.0006

0.0802 0.0691 0.4104 0.0596 0.3538 0.0514 0.3050 0.0245 0.2630 16 17 18 0.2267 0.0116 0.1954 0.1685 0.1452 0.8621 0.1252 0.7432 0.1079 0.6407 0.0930 0.5523 0.4761

7

3

5 6

9 8 1 2

4

Source:

12 35

50 17 18 20 19 25

10 40 11 45 30 13 14 15 16 ~

"""

7

9

8

2 1 3 5 6

4

30 35

16 17 50

20 19 25

11 10

12 13 14 15

18

40 45

0.8696 3.3522 3.7845

5.8474 5.9542 6.0472 6.1280 6.1982 6.4641 2.8550 4.1604 6.2593 15 2.2832 4.4873 6.5660 4.7716 5.0188 6.6166 5.4206 6.6418 5.5831 5.7245 6.6605

0.8772 3.4331 3.8887 7.1327 6.0021 6.1422

6.3729

6.5504

4.2883 6.6231 7.0027 14 2.3216 4.9464 5.2161 7.0700 1.6467 1.6257 7.1050 5.6603 7.1232 6.6543 5.8424

6.2651

7.0248 7.3300 6.8729 7.4957 2.3612 4.7988 4.6389 7.5856 0.8850 7.6344 3.5172 3.9975 7.6609 7.6752 6.3025 5.1317 6.4624 6.6039 6.7291 6.8399 6.4674 6.9380

2.9745 2.9137 13 5.4262 1.6681 5.6869 5.4527 5.2337 5.9176

7.8431 4.5638 4.4226 2.4018 0.8929 1.6901 3.0373 3.6048 6.1944 6.4235 6.1218 6.6282 5.3282 6.8109 6.9740 7.2497

4.1114

12 4.9676 5.6502 5.9377 8.0552 8.1755 8.2438 8.2825 8.3045

7.1909 5.1461 7.3792 7.5488 7.1196

7.8393 7.3658 7.9633 7.4694 4.7122 2.4437 0.9009 1.7125 3.1024 3.6959 6.4924 6.7499

5.5370

7.7016

11 4.2305

5.8892 6.2065 8.4217 8.6938 9.0079 8.8552 9.0417 8.9511

0.9091 1.7355 3.1699 3.7908 6.8137 7.1034 7.3667 6.9819 7.6061 5.3349 5.7590 7.8237

8.0216 4.3553 9.0770 8.2014 10 4.8684 8.3649 9.4269 6.1446 9.6442 6.4951 8.5136 9.7791 9.8628 9.9148

3.8897 7.4869 5.0330 7.7862

2.5313 2.4869 8.9501 6.417/ 0.9174 1.7591 6.8052 7.1607 3.2397

5.5348 5.9952

8.0607

8.5436 9.1285 9.8226 8.7556

10.2737 10.5668 10.7574 10.8812 10.9617

7.1390

7.9038 5.2064 5.7466 6.2469

9.6036

2.5771 6.7101 0.9259 1.7833 7.5361 3.9927

9.1216 8.2442 8.5595 9.3719 8.8514 8.3126 4.6229 4.4859 9.8181

10.6748 11.2578 11.6546 11.9246 12.1084 12.2335

0.9346 3.3872 3.3121 5.3893 5.9713 6.5152

4.1002 2.6243 7.0236 1.8080 7.9427

9.1079 9.4466 9.7632 8.7455

4.7665

7 8 9

10.3356

13.3317

13.8007

10.0591

10.5940 11.6536 12.4090 12.9477

13.6055

7.3601 7.8869 7.4987 0.9434 3.4651 5.5824 9.2950 6.2098 6.8017 9.7122 8.8527 8.3577

2.6730 1.8334

8.3838

4.9173

10.4773 10.8276

12.7834 13.7648

r)-n

+

r

5.7864 7.1078 6.4632 7.7217

2.7232 0.9524 1.8594 3.5460 5.0757 9.3936 9.8986 8.8633

4.3295 4.2124

8.3064

5 6

(1

12.4622 11.4699

15.3725

11.2741 11.6896

17.774115.4558

6.0021 7.4353

1:

2.7751 0.9615 3.6299 5.2421 9.9856 6.7327

8.1109

4.4518

1.8861 9.3851

8.7605

4

20.7200 21.482218.255915.7619

12.1657 12.6593

13.5903 15.622114.0939 17.2920

of

. 1 -

7.0197 6.2303 7.7861

8.5302

9.2526 0.9709 1.9135 3.7171 9.9540 5.4172

(r)

11.296110.5631

13.1661

14.8775 17.4131 21.487218.664616.374214.4982 19.6004 23.114819.792817.159115.0463 24.5187 25.7298

12.561111.652310.837810.1059 13.7535

annurty

an

rates

2.8839 2.8286 0.9804 3.8077 5.6014 6.4720

8.1622 8.9826

4.7136 4.5797 9.7868 1.9416

of

22.3965 24.9986

29.4902

31.4236

14.2919 14.9920

16.3514 19.5235 27.3555

value

Interest

6.7282 7.6517 7.3255

0.9901 3.9020 5.7955 9.4713

8.5660

4.8534 2.9410 1.9704

1 2 3

17.226015.678514.323813.133912.085311.1581 25.8077

12.133711.348410.6350 32.8347 36.0945 13.003712.1062 13.865112.849311.937911.118410.3797 39.1961

15.5623 16.3983

22.0232 18.0456 29.4086 10.3676 11.255110.5753

14.717913.sm

7

9

8

2

1 3 6 5

4

Present (n)

Years

30

14 15 50 10

19 20 25

11

12 35 13

16 17 18

40 45 """

N

-

7

9

2

3

5 6

8 1

4

35

20 19 25 17 11 45 30 10 12 13

14 15 50 16

18 40

30

3.2233

2.8021 2.6427 3.2682

3.3105 3.2948 3.0190 3.3158 3.3037 3.3321 3.0915 3.3330 3.1903 3.3332 0.7692 1.3609 3.3333

2.1662 3.2487 1.8161 2.4356

3.2832

publishers.

3.2388 3.1473

0.7752 3.3224

2.4830 3.3726 2.7000 2.9986 2.9247 2.8682 3.4210 3.4028 3.0997 3.4271 3.4423 3.3286 3.4130 3.4466 3.1781 3.4478 3.2859 3.4481 1.3761 3.4482 3.4483 3.3333 3.3507 1.8420 2.2031

3.3896

the

of

28 29 3.0758 3.1842

3.3351 3.5708 3.5712 3.5714 0.7812 3.4272 3.5714 2.2410 3.4587 2.5320 2.7594 3.4834 3.5026 2.9370 3.5386 3.5177 3.5458 3.5640 3.5294 3.5693 3.2689

1.3916

permission

2.8210

3.6400 27 3.1564 3.0087 3.2728 3.6726 3.6943 3.6536 3.7009 3.3644 3.7028 3.4933 3.3868 3.7034 3.7036 0.7874 3.5381 3.7037 3.5733 1.8956 1.8684 2.2800 2.5827 3.6010 3.6228

1.4074

By

(1980).

3.7985 3.6642 3.7705 26 3.0833 3.3657 3.8342

3.5435 3.4365 3.8450 3.6059 3.8458 3.8460 0.7937 3.6555 3.8461 2.3202 3.6949 2.6351 2.8850 3.7261 3.7509

3.2407 3.8083 3.7861 3.8424 3.4648

1.4235

1.9234

Reinhold

3.9424 3.9099 25 3.1611 3.4631

3.6564 3.9984 3.7251 3.9995 3.9998 0.8000 3.7801 3.9999 2.3616 3.8241 2.9514 3.8593 3.8874

3.9539 3.9279 3.9950 3.5705

1.4400

1.9520

.3._9849

3.2423 3.5655

3.7757

0.8065 3.9124 2.4043 3.9616 2.7454 2.6893

3.0205 4.1644 4.1659 4.1664 3.6819 4.1666

1.4568 4.0013 4.0333 1.9813 4.0967 4.0591 4.1103 4.1474 4.0799 4.1601

24

Nostrand

Van

3.0923 3.5179 3.4212 3.3289 3.3270 3.6731

3.9018 3.9852 3.8514 0.8130 2.0114 2.4483 4.2627 2.8035 4.2190 4.3232 4.3391 4.3447 4.3467 4.3474 4.0530 4.3477 4.1082

1.4740 4.1530 4.1894

4.2786 4.2431

23

edn,

3rd

3.4155 3.7863

0.8197 2.0422

2.8636 4.5139

4.5411 3.6193 4.0354 4.1274 4.5449 4.2028 3.9232 3.7993

1.4915 4.3152 4.3567 2.4936 4.3908 4.4603 4.4187 4.5338

22

Finance,

3.2446 3.1669 4.7559

3.5079 3.9054 4.7610

0.8264 1.5095 2.0739 2.5404 2.9260 4.5755 4.n13 4.7463 4.1769 4.2784 4.7596 4.5439 4.3624 4.7616 4.5452 4.4317 4.2646

4.4890

4.6079 4.0541

21

Company

of

3.6046

0.8333

2.9906 4.7746 4.9476

3.3255 4.3271 4.9915 4.4392 4.9966 4.9986 4.9995 4.6106

4.6755 1.5278 2.1065 4.7296 4.5364 4.8435 4.6346 4.4415 4.8696 4.6567 4.0310 4.8122 4.9789 4.1925

20

5.2611

3.0576 3.9544 3.8372 3.7256 3.7057 5.1951 5.2347 5.0700 5.2512 0.8403 5.2582

5.2623 4.9897

3.4098 4.4865 4.6105 5.1009 4.7147 4.5327 5.0333 4.8023

4.8759 1.5465 2.1399 4.9377 2.6386 2.5887

4.1633 4.3389

19

Management

5.5386 0.8475 5.5523 5.5541 5.0081

5.0916 4.6560 4.7932 3.8115 5.2223 4.9095 5.4669

1.5656 2.1743 2.6901 4.0776 4.3030 4.4941 5.1624

Wilkes,

and

5.8582 0.8547 5.8713 5.5482 5.8m 5.8801

5.3242 3.1993 3.1272 3.5892 3.4976 4.8364 5.4053 4.9884 3.9224 5.4746 5.7662 5.5339 5.2732 5.8294 5.5168

1.5852 2.2096

4.2072 4.4506

Samuels

6.2335 6.2421 6.2463

3.2743

6.0971

6.2153 5.0286 6.1m 0.8621 5.1971 5.3423 5.1183

5.5755 3.6847 5.6685 5.7487 5.9288 5.6278 5.3527 5.8178

5.8775 5.5845 5.3162 1.6052 2.2459

2.7982 2.7432 5.4675 5.2293 4.3436 4.0386 4.6065

4.8332 4.6586

16 17 18

7 9

3

5 6

8 1 2

4

35

Source:

11 30 45

13

50

20 17 25

18 40 10 19 12

14

15 16 Appendix 3: sources of information

The following list details the main sources of information on UK companies and. UK quoted securities. It is by no means comprehensive.

Company report and accounts

Available free of charge from the company secretary.

Extel cards

Summaries of published information, one card for each company.

McCarthys

Press comment on companies.

Stockbrokers' reports

These can be on specific companies, industries or countries. 422 Appendix 3: Sources of Information 423 Financial Times (and other main daily and Sunday newspapers)

The results of UK companies are published in the Financial Times and there will usually also be comment for the major companies.

Industry surveys

Many market research companies produce industry reports. These will not usually be available to the general public free of charge.

Topic

Real-time stock exchange prices available on television on payment of a monthly subscription. Teletext has share prices which are changed several times a day for no charge.

Bloomberg

Real-time analytic service on bonds and equities, and their derivatives, available for institutional .

Datastream

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Note: The main library in London at which most of the above information is available is the City Business library. This library is open to the general public and is situated at 106 Fenchurch Street, London EC3. Appendix 4: summary of formulae used

Chapter 2

Holding period return

Fisher's relation

(1 + R) = (1 + r) (1 + E(infl)) where R is the nominal interest rate and r the real interest rate

Expected return

i-n E(R) = I pfti i = 1

Variance

i =" v = I P;(R; - E(R))2 i- 1

424 Appendix 4: Summary of Formulae Used 425 Standard deviation

S = v'V

Expected utility of wealth

i = n E(U(W)) = ~ p;U(W;) i = 1

Interest

On a fixed interest security

Interest yield = ..!!.._ ( x 100) Po Multiplying by 100 simply expresses the result in percentage rather than decimal form.

Dividend valuation model

p = D1 + D2 + ... + Dn + Pn 0 (1 + R) (1 + R) 2 (1 + Rt

Chapter 3

Redemption yield

The redemption yield is the R in the equation

D D D 100 Po = (1 + R) + (1 + Rf + ... + (1 + Rt + (1 + Rt 426 Appendix 4: Summary of Formulae Used Linear interpolation formula

Duration

D = 1. PV1 + 2. PV2 + ... + N.PVN Po Po Po

Chapter 4

Spot rates

These are interest rates r; in the expression

Forward rates

These are implicit in the spot rates. For example,

Chapter 5

Gross yield

D 100 GDY=-X---0 P0 (100- A) Appendix 4: Summary of Formulae Used 427

where D 0 is the net dividend paid and A the ACT rate in %.

Net

NDY=~ Po

Dividend cover

Dividend cover = epso dps0

PE ratio

PE=~ eps0

Gordon's growth model

- D P o---Dl R=-1 +g R- g Po

Payout ratio 428 Appendix 4: Summary of Formulae Used

Chapter 6

Fair futures price

F = C + i x ...!!..._ - div yield over period 365

Number of gilt contracts for hedge

G = Nominal value CTD gilt x Conversion factor £50,000

Chapter 7

Minimum value of call option

C ~ S- PV(X)

Relationship between put and call option on expiry

S+P=C+X

Black-Scholes formula

(See Appendix to Chapter 7.) Appendix 4: Summary of Formulae Used 429

Value of CULS

CULS = value of equivalent ULS + value of option to convert into ordinary shares

Chapter 8

Expected return and risk of portfolio of two securities

Expected return and risk of portfolio of n securities

i-= n E(Rp) = I W,E(R;) i = 1 where W, is the proportion held of security i

i = n i = n j ... n ~ 2 2 ~ vp = ~ w.I Sl + .. I w,wjcov,j i = 1 i- 1 i- 1 i""j

Covariance

i ... n COVAB = I (RA. - E(RA)) (RB. - E(RB)) p(R;) j- 1 I l

Correlation coefficient 430 Appendix 4: Summary of Formulae Used

Chapter 9

Sharpe's market model

Capital market line

Securities market line

or

Security risk

(Total risk = market risk + specific risk)

Arbitrage pricing model Appendix 4: Summary of Formulae Used 431

Chapter 10

Excess return

Fair game

; .,. n ~ ei,t+t = 0 i ., 1

Chapter 11

Forward exchange rate

+ discount quoted in Financial Times x, = X o - premium quoted in Financial Times

Interest rate parity

where R£ and R5 represent the interest rates available in each currency.

Purchasing power parity

X 1 = P1/ P10 = 1 + E(infl1)

X 0 Pd/Pdo 1 + E(infld) 432 Appendix 4: Summary of Formulae Used

International Fisher

1 + R5

1 + E(infl5)

Chapter 13

Measures of portfolio performance

Sharpe measure

Treynor measure -- Rp- RF ~p

Geometric mean

Solution to quadratic equation

If ax 2 + bx + c = 0,

x = (-b ± Yb 2 - 4ac) 2a Bibliography

G. J. Alexander (1986) Portfolio Analysis, 3rd edn, Prentice-Hall. L. Bachelier (1900) Theorie de Ia , Gauthier-Villars. R. Ball (1990) 'What do we know about market efficiency?', unpublished manu• script, William E. Simon Graduate School of Business Administration, Univer• sity of Rochester. Bank of England Quarterly Bulletin (1989) 'Chart analysis and the foreign exchange market' (November) pp. 54~51. W. H. Beaver (1981) Financial Reporting: An Accounting Revolution, Prentice• Hall. F. Black (1972) ' equilibrium with restricted borrowing', Journal of Business (July) pp. 445-55. M. Blume (1975) 'Betas and their regression tendencies', Journal of Finance, vol. 10, no. 3 (June) pp. 785-95. R. A. Brealey (1983) An Introduction to Risk and Return, 2nd edn, Basil Blackwell. S. J. Brown and J. B. Warner (1985) 'Using daily stock returns: the case of event studies', Journal of , vol. 14, pp. 3-32. T. E. Copeland and J. F. Watson (1988) Financial Theory and Corporate Policy, 3rd edn, Addison-Wesley. E. Dimson and P. Marsh (1984) 'An analysis of brokers' and analysts' unpublished forecasts of UK stock returns', Journal of Finance, vol. 39, no. 5, pp. 1257-92. E. J. Elton and M. J. Gruber (1991) and Investment Analysis, 4th edn, Wiley. E. F. Fama (1970) 'Efficient capital markets: a review of theory and empirical work', Journal of Finance, vol. 25, no. 2 (May) pp. 383-417. --- (1972) 'Components of investment performance', Journal of Finance, vol. 27, no. 3 (June) pp. 551-67. --- (1984) 'The information in the term structure', Journal of Financial Economics, vol. 13, pp. 509-28. --- (1991) 'Efficient capital markets: II', Journal of Finance, vol. 46, no. 5 (December) pp. 1575-1617. E. F. Fama, L. Fisher, M. C. Jensen and R. Roll (1969) 'The adjustment of stock prices to new information', International Economic Review, vol. 10, no. 2 (February) pp. 1-21. I. Fisher (1930) The Theory of Interest, Macmillan. M.D. Fitzgerald (1978) 'Media and investment advisory service recommendations and market efficiency', Salomon Brothers Center for the Study of Financial Institutions, Working Paper, no. 159, New York University. R. L. Hagin (1979) The Dow-Jones Irwin Guide to Modern Portfolio Theory, Dow-Jones Irwin. 433 434 Bibliography

P. Hastings (1977) 'The case of the Royal Mail', in W. T. Baxter and S. Davidson (eds), Studies of Accounting Theory, 3rd edn, Institute of Chartered Account• ants in England and Wales, pp. 339-46. R. T. Henriksson (1985) ' and mutual fund performance: an empiri• cal investigation', Journal of Business, vol. 57, pp. 73-96. J. Hull (1991) Introduction to Futures and Option Markets, Prentice-Hall. R. A. Ippolito (1989) 'Efficiency with costly information: a study of mutual fund performance, 1965-1985', Quarterly Journal of Economics, vol. 104, pp. 1-23. R. A. Jarrow and A. Rudd (1983) Option Pricing, Irwin. R. W. Kolb (1992) Investments, 3rd edn, Kolb. M. D. Levi (1990) International Finance: The Markets and Financial Management of Multinational Business, 2nd edn, McGraw-Hill. London Business School, Risk Measurement Service, quarterly. J. H. Lorie and M. T. Hamilton (1973) The : Theories and Evidence, Irwin. J. Madura (1986) International Financial Management, West. H. M. Markowitz (1991) Portfolio Selection: Efficient Diversification of Investment, 2nd edn, Basil Blackwell. Midland Bank Series New Issue Statistics, February issues, Midland Bank Review. A. B. Moore (1962) 'A statistical analysis of prices', unpublished Ph. D. dissertation, University of Chicago. V. Niederhoffer and P. Regan (1972) 'Earnings changes, analysts' forecasts, and stock prices', Financial Analysts' Journal, vol. 28, no. 3 (May-June) pp. 65-71. J. M. Patell and M.A. Wolfson (1984) 'The intraday speed of adjustment of stock prices to earnings and dividend announcements', Journal of Financial Econ• omics, vol. 13, pp. 223-52. H. V. Roberts (1959) 'Stock market "patterns" and financial analysts', Journal of Finance, vol. 14, no. 1 (March) pp. 1-10. S. A. Ross (1976) 'The arbitrage theory of capital asset pricing', Journal of Economic Theory, vol. 13 (December) pp. 341-60. W. F. Sharpe (1963) 'A simplified model for portfolio analysis', Management Science (January) pp. 277-93. B. H. Solnik (1974) 'Why not diversify internationally rather than domestically?', Financial Analysts' Journal, vol. 30, no. 4 (July-August) pp. 48-54. --- (1991) International Investments, 2nd edn, Addison-Wesley. Wilson Report (1980) Report of the Committee to Review the Functioning of Financial Institutions, Cmnd 7937 (June) HMSO. Index

abnormal return see excess return in 270-4, 404-11 account day 15 portfolio 270 accounting treatment 148 stationarity of 269 Accounting Standards Board 149 tables 268 accrued interest 70-2 world 344 ACT see advance corporation tax bibliography 433-4 active investment policy 39~ bid/ask spread actuary 356 exchange rates 321-3 advance corporation tax 140-1 shares 12 267 Big Bang 11-12, 16 allotment policy 133 binomial option valuation model 205 American option 189 Black, F. 275 announcement date, trading on 301 Bloomberg 18, 423 annuity 80 Blume, M. 269 tables 418-21 bonds arbitrage 166 cheapest to deliver 117 covered interest 329 equity-linked 222-3 APT see hybrid 217 arithmetic mean 310 plain vanilla 117, 217, 221 asset allocation 395-6 straight 117 investment and unit trusts 379 with warrants 221-2 pension funds 362-5 zero coupon 98-9, 108, 223, 262 Association of Investment Trust see also gilt-edged securities Companies 355 bond, corporate 32-5, 114-21, assurance 366 217-24 attitude to risk 51-5, 390 bonus issue see scrip issue auction 73 breakout 293, 295 average life 101 Brealey, R.A. 150, 152, 276, 285 broker dealer 14-16 Bachelier, L. 284 brokerage commission Ball, R. 302 details 414 bear market 293, 396 gilts 18-20 bearer security 65 options 191 beat the market 283 shares 16--18 Beaver, W.H. 304 Brown, S.J. 301 benchmark portfolio 273-4, 310, 404-6 bull market 293-4, 396, 408 buy list 294, 396 definition 266 use of 396 call option measurement of 267 Black-Scholes value 204-6, 225-6 performance measurement use comparison with shares 191-3 435 436 Index call option cont. consumption preference 10, 390 factors influencing value 199-201 contract, option 191 graphical presentation 194 conversion hedging risk with options 197-9 factor 171 valuation 201-6 premium 218 written contract 197 price 218 capital asset pricing model 257-78 ratio 218 alternatives to 276-8 convertible unsecured loan stock 113, assumptions 261-2 217-20 international 343-6 characteristics 217-9 practical application of 269-74 option valuation of 219-20 problems with 274-5 Copeland, T.E. 101 use in performance corporate debt see bonds, corporate measurement 270-74, 402-11 corporation tax capital gains tax advance 140-1 on gilts 68 mainstream 140 on shares 143 correlation coefficient capital market actual/forecast returns 304 integrated 343 between equities/gilts/cash 393 line 266 international 340-2 segmented 344 perfect negative 240-2 capitalisation issue see scnp 1ssue perfect positive 237-9 CAPM see capital asset pricing model serial 285 cash flow small positive 242-4 timing of 6-7 unrelated 239-40 uncertainty of 7-8 zero 239-40 CBOE see Chicago Board Options cost of carry 78, 174-6 Exchange coupon 66-9 CBOT see Chicago Board of Trade covariance 236-7 charge Crash of 1987 216, 218, 293, 392 fixed 116 CULS see convertible unsecured loan floating 116 stock chartism 291-4 cum div 71-2 cheap 102 currency forwards 321-3 cheapest to deliver gilt 177 currency futures 166-7 Chicago Board Options Exchange 187 Datastream 18, 423 Chicago Board of Trade 163 day trader 169 Chicago Mercantile Exchange 163 dear 102 City Business Library 423 debentures 32-3, 116-17 clean price 70-1, 82-3 convertible 126 clearing charge 416 subordinated 33 CME see Chicago Mercantile unsubordinated 33 Exchange debt commission see brokerage capital 116-19 commission corporate 32 Committee, Wilson 354 fixed interest 32 commodities market 57-8 government 35 computer program see also bonds, corporate 250 default risk 32-3 option valuation 204-7 deliverable gilt 170, 176-7 congestion area 291 delivery month 172 Consol 36, 68 delta 201 Index 437

delta hedge 214 interest rate 110 depreciation, impact on earnings 144, semi-strong form 288, 297-306 148 strong form 288, 306-7 derivative 162 weak form 288, 291-7 see also option, call option, financial efficient portfolio 249-53, 261-2, 266, future, put option 276-7 differential return 403-6 elasticity 101 Dimson, E. 305 embedded option 217-24 dirty price 70-1, 78, 82-3 Elton, E. 234, 247, 250, 269, 277 diversification 57-8 EMH see efficient markets hypothesis international 339-46 equilibrium value 287 Markowitz 255 equity 127 naive 252 see also ordinary share dividend 31-2 equity-linked bond 222-3 cover 144, 159 equity index futures 174-6 net 140 ERM see Exchange Rate Mechanism payout ratio 144 eurobond 66, 117-9 policy 142, 361 eurocurrency 326-9, 347-8 dividend valuation models 151-6 eurodollar 326-9, 347-8 dividend yield 138-43 euromarket 347-8 gross 140-1 European option 189 double taxation treaty 317 ex div 71 Dow (Charles) 293 special 71-2 Dow Jones share index 285, 294, 309 excess return 281, 301-2, 404-8 294 exchange controls 316 downside risk 48 Exchange Delivery Settlement DTB 12 Price 173 duration 98-9 Exchange Rate Mechanism 317 estimating price changes with exchange rates 101-3 forecasting 331-2 hedging with 99-101 forward 321-3 modified 102 spot 321-3 weighted switch 102 exercise price 189 earnings 145-50 fair gamble 54 normalised 146 fair game 289-90 142, 145-50 fair price 174 cyclicality 146 fair return for risk 281-4 forecasting 150, 154 Fama, E. 285, 301, 302 full distribution 159 efficient markets hypothesis 288 measurement problems 144-5, measures of performance 406 148-50 filter rule 295 net 149 financial forward contract 163 nil 149 financial futures 163-83 EDSP see Exchange Delivery bond 170-1 Settlement Price equity index 174-6 efficient frontier 248 growth of 164-6 international 344-5 hedging 179-83 efficient markets hypothesis 261-312 margining system 165 definition 288-9 pricing 173-7 empirical evidence 284-5, 297, term interest rate 167-70 301-3 trading 177-9 implications 285-7, 296-7 types of 166-73 438 Index financial investment 3-4 bearer 65--6 Financial Times see Ff cheapest to deliver 177, 181-2 Fisher, I. comparing 96 theory of interest rates 42 coupon 35, 66-9, 94 international theory of interest definition 35 rates 334-6 deliverable 170-1, 176-7 Fisher, L. 301 description 65-76 fixed charge 116 duration 98--103 fixed interest securities futures contract 170-1 description of (gilts) 62-72 holders 63 market value 113 index-linked 74-6, 82-9 other (than gilts) 1B-21 interest payments 66-9 private sector 114-21 interest yield 77-9 public sector 113-4 69 tax characteristics 117-21 maturity 69--70 transaction costs 17 medium 69 turnover 113 methods of issue 73-4 zero coupon 105 ownership 63, 359 see also bonds redemption date 36, 39 fiat yield see interest yield redemption yield 79-82 floating charge 116 registered 65--6 flotation 133 risk 35, 38--43 foreign currency market 58 short 69 forward discount 322 switching 99 forward exchange rates 321-3 tax on 68 forward interest rates 108--10 tranches 73 bias 109 undated 36, 69--70 predictors of future spot rates valuation 105-12 108--10 variable rate 74 pricing short-term interest rate 99 futures 173 yield on 36-8 forward market 57, 163 Gordon's growth model 153--6 forward premium 323 government securities frequency distribution 45 British funds 65-76 (see also gilt• FSA charge 416 edged securities) Ff-Actuaries share indices 147, 274, French 75 308--11 Irish 113 Ff-Actuaries All-Share Index 274, Gruber, M. 234, 247, 250, 269, 277 309 Ff Industrial Ordinary 30 Shares Hagin, R. 297 Index 309 Hamilton, M. 158 Ff-SE 100 Share Index 171-3, 309 head and shoulders 291-2 Ff-SE Mid 250 Share Index 310 hedge ratio Ff-SE 350 Share Index 310 financial futures 180-3 fundamental analysis 158, 297-301 options 199 futures contract see financial futures hedging 57-8 futures market 57-8 delta 214 dynamic 214 exchangerisk 323-9 geometric mean 306, 399 interest rate risk 99--101, 167-71 gilt-edged securities 35, 62-89 risk 57-8 accrued interest 70-2 with financial futures 179-83 annual average return 30 with options 197-9, 210-17 Index 439

Hendriksson, R. 306 inter-dealer broker 19 holding period return 28-31 interest rate Hull, J. 205 forward 108-12 nominal 42 IDB see inter-dealer broker real 42, 74 imputation tax system 140 risk 38-40, 167-70 index see share index spot 105-8 index fund 273-4, 303, 308-11, 396 term structure 105-12 index-linked gilts 74--6, 82-9 interest rate parity 329-30 base date 82 interest rate risk 38-40, 167-70 return on 82-9 hedging 167-71 index options 210-2 sensitivity to 97-103 indifference curve 243-5, 249-51 interest yield 77-9, 94, 121 inflation gross 121 actual 42 net 121 effect on investing institutions real 82-4 358-60, 368-9 intermediary 12 expected 42 information 304 factor in investment policy 391-4 internal 79, 401 unexpected 43 international inflation premium hypothesis 111-12 capital asset pricing model 343-6 inflation risk 40-3 diversification 339-46 hedging 58, 391-4 Fisher effect 334-5 premium 111-12 investment 315-48 information portfolio theory 339-42 asymmetry of 304 intrinsic value 158, 298-9 insider 288, 380 investing institutions 351-84 intermediary 304 access to insider information 380 publicly available 288, 298 accountability 354 insider 306-7 impact on share prices 382 information 288, 380 investment analysis 380-81 Institute of Investment Management ownership of securities 359 and Research 298 performance 306-7, 381 institutions, investing 351-84 portfolio holdings 359 insurance, pooling of risk 56-7, 365 portfolio turnover 379 insurance company 365-71 relationships with company composite 366 managements 381-2 general 366-7 investment investment objectives and analysis 158, 291-307, 395-7 policy 367-71 analysts 158, 298, 285-306 legislation 370-1 financial 3, 4 liabilities 368-9 physical 3, 8, 9, 11 long-term 367 quoted 4 mutual 366 investment objectives and solvency margins 370 policy 389-97 tax 369-70 factors to consider 389-95 insurance policy of insurance companies 367-71 endowment 366 of investment and unit trusts 375-9 mortgage indemnity 365 of pension funds 356-65 non-life 366 types of 395-7 unit-linked 368 investment strategy with profits 368 active 395-6 integrated capital market 343 beat the market 283, 408 440 Index investment strategy cont. life assurance 366 29fr.. 7 LIFFE see London International factors to consider 389-95 Financial Futures Exchange fair return for risk 281-4 limited liability 129 international 31fr-7 line pattern 291 passive 39fr..7 liquid assets 63-4 picking winners 274, 281-4 liquidation 131 trading on announcement 301 liquidity premium 11 types of 395-7 hypothesis 111 investment trust company 371-4 listed security 5 asset mix 379 113-7 closed end 374 loan stock 33, 113-7 discount to 372-3 convertible unsecured 113, 217-20 gearing 372 unsecured 33, 11fr-7 portfolio turnover 378 London Business School premium to net asset value 372-3 Risk Measurement Service 268-9, split capital structure 374 272,408 tax 377 London International Financial timing and selection 377-8 Futures Exchange 163-4 unitisation 374 London Traded Options Market 211 Lorie, J. 158 individual 21 LTOM see London Traded Options informed 304-5 Market institutional 21 type of 21 McCarthys 422 uninformed 304-5 Madura, J. 335 put options 234-5 mainstream corporation tax 140-1 Ippolito, R. 307 IRR see internal rate of return initial 165 issue requirements 172 auction 73 variation 165 methods of gilt issue 73-4 market methods of share issue 132-8 bear 293 primary 132-4 bull 294, 396 rights 134-6 efficient 281-312 secondary 134-8 frictionless 261 tap 73 integrated 343 tender 73, 134 mood of 293 issuer call option 233-4 perfect 261, 287, 290 lTC see investment trust company segmented 344 market index 274, 308-11 Jarrow, R. 201 14-6 Jensen, M. 300 market model 259 measure of performance 402-7 advantages of 260-61 267, 270, 273 Kolb, R. 302 market premium 271 market price 5-6, 13-15 law of one price 332 market risk 264 LBS see London Business School market segmentation hypothesis legislation 354 111-12 insurance companies 370-1 Markowitz, H. 235, 247 investment and unit trusts 37fr-7 Marsh, P. 305 pension funds 365 matching 40, 95 Levi, M. 331, 332 exchange risk 325 Index 441

matrix 250 embedded 217-24 maturity of gilt 69-70 European 189 mean exercise price 189 arithmetic 310 factors affecting value 199-201 geometric 309, 399 graphical presentation 194-7 measures of performance hedge ratio 199 summary measures for ordinary hedging strategies 210-17 shares 138-50 implied volatility 207 see also performance measures index 210-2 mechanical trading rules 294-7 in the money 191 minimum commission 16 investor put 223-4 minimum price 73 issuer call 223-4 modified duration 102 naked 208 monitoring costs 377, 397 out of the money 191 mood of the market 293 put 189 Moore, A. 285 seller 188 mortgage indemnity insurance 365 striking price 189 multi-index model 276-7 tax 187 time value 200 naive diversification 253 traded 189-91 naked option 208 traditional 189-91 uncovered 197 National Association of Securities valuation model Dealers Automated Quotations 201-7 system 12 volatility 207-8 National Debt 62-3 written 197 call option National Savings Certificate 75 see also option valuation model 201-7, 225-6 National Savings Stock Register 19 Black-Scholes neckline 291 201-7, 225-6 binomial 205 net dividend per share 140 computer program 204-7 187 upper and lower Niederhoffer, V. 299-300 bounds 202-3 value of call nominal value 7 204-6, 225-6 normal distribution function, areas value of put 206-7 ordinary under 227-8 shares 125-59 'A' 129 normal probability distribution 48-9 deferred 126 dividend 138-44 offer for sale 133 dividend cover 144, 159 open interest 167 dividend yield 138-44 opportunity set 248 ex-rights price 136 optimal portfolio 244, 246, 251-3, fundamental analysis 158, 297-301 262 holding period return 150-1 international 342 intrinsic value 158 option limited liability 129 American 189 market value 129 call 189 methods of issue 132-8 combinations of options 196-7 nominal value 129 comparison of bought put and sold non-voting 129 call 208-10 ownership 127, 352 comparison with shares 191-3 129 contract 191 PE ratio 144-50 covered 197 risk 31-2, 157 delta 201 subscription price 136 description 189-91 summary measures for 138-50 442 Index ordinary shares cont. market 267, 270, 273 transactions 126 optimal 244, 246, 251-3, 262 turnover 126 randomly selected 252 valuation 151--6 riskless 242 over the counter ( OTC) 5 portfolio theory 233-55 combination of 2 securities 243 Panel on Takeovers and Mergers 16 combination of n securities 247-9 passive investment policy 396-7 data requirements 254 Patell, J. 302 international 339-42 PE ratio 144-50 one-period model 254 pension problems with 253-4 Act 354 size of optimal portfolio 251-3 Pay as You Go 383-4 portfolio turnover 378 pension fund 353--65 pound averaging 362 accountability 355, 356 PPPT see purchasing power parity asset mix 361-5 theory funding 356 preference dividend 120 investment objectives and preference share 33, 120--1 policy 357--65 irredeemable 120 liabilities 358--60 convertible 219-20 risk level 363 premium structure 356 forward rate 108--12 tax 360--61 inflation 111 timing and selection 362 liquidity 11' 111 PEP see personal equity plan market 271 perfect market 261, 287, 290 risk 157 performance measure present value 36, 80 differential return 403-5 tables 418--9 Fama 406 price-earnings ratio see PE ratio Jensen 403, 405-7 price factor 171 relevance of 410--11 pricing reward per unit of risk 403 financial futures 173-7 risk adjusted 403 options 201-7, 226-7 selectivity 406-8 10 Sharpe 402-3 primary issue 132-4 timing 409 privatisation 133-4 Treynor 402-3 probability 44-5 performance measurement 397-411 objective 45 calculating return 399-402 subjective 45 adjusting for risk 402--6 probability distribution 45-9 analysing performance normal 48 measures 406-11 skewed 48 personal equity plan 127, 391 PTM see Panel on Takeovers and physical investment 3, 8, 9, 11 Mergers picking winners 274, 281-4 PTM levy 16, 416 plain vanilla bond 117, 217, 221 Public Sector Borrowing point and figure chart 291 Requirements 74 political risk 318 purchasing power parity theory pooling of risk 56-7, 365--6 332-3, 336 portfolio benchmark 273-4, 309, 404-5, R2 407 410--11 random walk 284-5 efficient 248--9, 262, 266, 277 redemption yield 79-82, 93-7 Index 443

changesin 96-7 Risk Measurement Service 268-9, comparison of 93-7 272,408 Financial Times calculation of risk preferring 55 real 85-9 risk premium 157 sensitivity 98-9 ROI 410 Regan, P. 299-300 Roll, R. 277, 301 registered security 65-6 critique of CAPM 277 regression 108, 260-1 RPI see retail prices index 295 Rudd, A. 201 retail prices index 75, 83 running yield see interest yield retained earnings 143 runs tests 285 return annual 5 scrip dividend 137 annual average 30 scrip issue 137-8 excess 282, 301-2, 404-8 SEAQ see Stock Exchange expected 46 Automated Quotation system holding period 28-31 secondary issue 134-8 internal rate of 79, 401 10 normal 301 security on investment 411 bearer 66-7 time-weighted rate of 400--2 gilt-edged 35, 62-89 reward per unit of risk 403 listed 5 rights 135 marketable 5 rights issue 134-6 quoted 4-5 deep discount 136 registered 65-6 underwritten 136 risk-free 263 risk unlisted 5 adjusting for 403 securities market line 266-7 attitude to 51-5, 390 segmented capital market 344 default 32-3 selectivity 406-8 definition 47-9 gain from 407 diversifiable 267, 271-2, 274, 405-8 of investment and units trusts hedging 57-8 377-8 inflation 40-3, 111-12, 391-4 of pension funds 362 interest rate 38-40, 167-70 sensitivity factor see beta interest rate 38-40, 167-70 SEPON see Stock Exchange Pool market 263 Nominees measurement of 44, 49-50 serial correlation 285 pension fund 362 SERPS see State Earnings Related political 317 Pension Scheme pooling 56-7, 365-6 settlement premium 157 bond futures 170-1 reduction 55-8 fixed interest securities 19-20 share 31-2, 157 shares 15-16 specific 267, 271-2, 274, 405-8 shareholder 9 transfer of 8-10 dominant 381 unit market price of 266 individual 352-4 risk-adjusted performance institutional 351-5 measures 403 ordinary 30-2 risk averse 55, 246 preference 33 risk-free share index 307-10, rate 263-7, 269, 270-3 Dow Jones 285, 294, 309 security 263 IT-Actuaries 147, 311 444 Index share index cont. Stock Exchange Automated Quotation Ff-Actuaries All-Share 274, system 12 310-11 Stock Exchange Pool Nominees 15 Ff Industrial Ordinary 30 stock market 8-11, 20-2 Shares 309 changing face of 20-2 Ff Indices 308-11 dual capacity 11 Ff-SE 100 171-3, 309 indices 308-11 Ff-SE Actuaries 350 310 role of 8-11 Ff-SE Mid 250 310 11-14, 18-19, 379-80 share issue 132-8 commission 11, 16-18, 415 primary 132-4 minimum commission 11 rights 13~ straddle 196-7 scrip 137-8 straight bond 117 secondary 134-8 strap 197 share price behaviour 285-91 striking price 189 share transaction costs 16-8, 415-6 strip 197 share valuation models 151-6 switching 99 Sharpe, W. 259--61, 402-3 Sharpe's market model 259--61 takeovers 136 Sharpe's measure of talisman 15 performance 402-3 tap stock 73 single capacity 11, 13 TAURUS 15 single index model 276-7 tax sinking fund 70 advance corporation 140-1 Social Security Pension Act 1975 354 capital gains 68, 143 SOFFEX 12 corporation 138 Solnik, B. 251, 340 credit 360-1 sources of information 422-3 factor in investment policy 391 South Sea Bubble 187 on gilts 68 special ex div 71-2 insurance companies 369-70 specialist 304 investment and unit trusts 377 specific risk 267, 271-2, 274, 405-8 mainstream corporation 140-1 speculator 58 on options 187 spot pension funds 360-1 exchange rates 321-3 on shares 143 interest rates 105-8 291-7 rate curve 106-8 tender offer 73, 134 transaction 58 term structure of interest rates stamp duty 16, 415-16 105-12 contract 16, 415-16 hypotheses 111 transfer 16, 415-16 tick size 169, 172 standard deviation 48-9, 51, 233 tick value 172 of portfolio 236-7 time series 284 State Earnings Related -Pension lagged 284 Scheme 356 time-weighted rate of return 400-2 stock 9 timing performance measurement Stock Exchange 1-22 of 409 account 15, 211 timing and selection indices 308-11 investment and unit trusts 377-8 Official Year Book 126 measurement of performance 409 turnover 126 pension funds 362 Yellow Book 132 TOPIC 12, 423 Index 445 traded option 189-91 logarithmic 254 see also call option and option quadratic 52 trading rules, mechanical 294--7 risk averse 54, 245 transaction costs 16--18, 415-6 utility of wealth, expected 51-5 factor in investment policy 378, 396--7 valuation models fixed interest securities 19, 415-16 dividend 151-6 institutions 378 earnings 154-6 options 191, 416 gilt 105-12 shares 16--18, 415-16 Gordon's growth 153 transfer stamp duty 16, 415-16 option 201-7, 225-6 Treasury bill 69 share 151-6 Treynor measure of variability 271 performance 402-3 variance 49-50, 233 triangle 290 budget 398 Trustee Investment Act 1961 361, of portfolio 235-7 363 variance-covariance matrix 250 turnover volatility equities 126 of options 207-8 gilts 63 implied 207 TWROR see time-weighted rate of volume, share trading 293 return voting rights 129-30 uncertainty of income 31-2 waiting transfer of 10--11 underwriting 133 Warner, J. 302 unit price of risk 266 warrant 221-2 unit trust 374--9 wealth, utility of 51-5 asset mix 379 Weston, J. 101 authorised 376 Wilson Committee 75, 354 description 374--5 winding up 117 exempt 376 Wolfson, M. 302 investment objectives and world CAPM 343-4 policy 375-9 written call option 197 legislation 376--7 open and 374 yield 36--8 portfolio turnover 378 gross 121 tax 377 net 121 timing and selection 377-9 yield curve 103-12 Unit Trust Association 355 falling 104 unlisted security 5 flat 104 Unlisted Securities Market 5, 20--1, forward rate 108-10 129 hypotheses 110--12 unsecured loan stock 33, 116--7 humped 104, 112 USM see Unlisted Securities Market rising 104 utile 53 utility function 51-5, 244--5 zero coupon bond 98-9, 105, 108, cubic 52 223, 262