Download Investment Science eBook
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ISBN 0195108094
Pages 512
Publisher Oxford University Press, USA
Author(s) David G. Luenberger
Release Date July 3, 1997
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Review
1.Introduction 1.1. Cash Flows 1.2. Investments and Markets 1.3. Typical Investment Problems 1.4. Organization of the Book I. Deterministic Cash Flow Streams 2. The Basic Theory of Interest 2.1. Principal and Interest 2.2. Present Value 2.3. Present and Future Values of Streams 2.4. Internal Rate of Return 2.5. Evaluation Criteria 2.6. Applications and Extensions 2.7. Summary 2.8. Exercises 3. Fixed-Income Securities 3.1. The Market for Future Cash 3.2. Value Formulas 3.3. Bond Details 3.4. Yield 3.5. Duration 3.6. Immunization 3.7. Convexity 3.8. Summary 3.9. Exercises 4. The Term Structure of Interest Rates 4.1. The Yield Curve 4.2. The Term Structure 4.3. Forward Rates 4.4. Term Structure Explanations 4.5. Expectation Dynamics 4.6. Running Present Value 4.7. Floating Rate Bonds 4.8. Duration 4.9. Immunization 4.10. Summary 4.11. Exercises 5. Applied Interest Rate Analysis 5.1. Capital Budgeting 5.2. Optimal Portfolios 5.3. Dynamic Cash Flow Processes 5.4. Optimal Management 5.5. The Harmony Theorem 5.6. Valuation of a Firm 5.7. Summary 5.8. Exercises II. Single-Period Random Cash Flows 6. Mean-Variance Portfolio Theory 6.1. Asset Return 6.2. Random Variables 6.3. Random Returns 6.4. Portfolio Mean and Variance 6.5. The Feasible Set 6.6. The Markowitz Model 6.7. The Two-Fund Theorem 6.8. Inclusion of a Risk-Free Asset 6.9. The One-Fund Theorem 6.10. Summary 6.11. Exercises 7. The Capital Asset Pricing Model 7.1. Market Equilibrium 7.2. The Capital Market Line 7.3. The Pricing Model 7.4. The Security Market Line 7.5. Investment Implications 7.6. Performance Evaluation 7.7. CAPM as a Pricing Formula 7.8. Project Choice 7.9. Summary 7.10. Exercises 8. Models and Data 8.1. Introduction 8.2. Factor Models 8.3. The CAPM as a Factor Model 8.4. Arbitrage Pricing Theory 8.5. Data and Statistics 8.6. Estimation of Other Parameters 8.7. Tilting Away from Equilibrium 8.8. A Multiperiod Fallacy 8.9. Summary 8.10. Exercises 9. General Principles 9.1. Introduction 9.2. Utility Functions 9.3. Risk Aversion 9.4. Specification of Utility Functions 9.5. Utility Functions and the Mean-Variance Criterion 9.6. Linear Pricing 9.7. Portfolio Choice 9.8. Log-Optimal Pricing 9.9. Finite State Models 9.10. Risk-Neutral Pricing 9.11. Pricing Alternatives 9.12. Summary 9.13. Exercises III. Derivative Securities 10. Forwards, Futures, and Swaps 10.1. Introduction 10.2. Forward Contracts 10.3. Forward Prices 10.4. The Value of a Forward Contract 10.5. Swaps 10.6. Basics of Futures Contracts 10.7. Futures Prices 10.8. Relation to Expected Spot Price 10.9. The Perfect Hedge 10.10. The Minimum-Variance Hedge 10.11. Optimal Hedging 10.12. Hedging Nonlinear Risk 10.13. Summary 10.14. Exercises 11. Models of Asset Dynamics 11.1. Binominal Lattice Model 11.2. The Additive Model 11.3. The Multiplicative Model 11.4. Typical Parameter Values 11.5. Lognormal Random Variables 11.6. Random Walks and Wiener Processes 11.7. A Stock Price Process 11.8. Ito's Lemma 11.9. Binomial Lattice Revisited 11.10. Summary 11.11. Exercises 11.12. References 12. Basic Options Theory 12.1. Option Concepts 12.2. The Nature of Option Value 12.3. Option Combinations and Put-Call Parity 12.4. Early Exercise 12.5. Single-Period Binomial Options Theory 12.6. Multiperiod Options 12.7. More General Binomial Problems 12.8. Evaluating Real Investment Opportunities 12.9. General Risk-Neutral Pricing 12.10. Summary 12.11. Exercises 12.12. References 13. Additional Options Topics 13.1. Introduction 13.2. The Black-Scholes Equation 13.3. Call Option Formula 13.4. Risk-Neutral Valuation 13.5. Delta 13.6. Replication, Synthetic Options, and Portfolio Insurance/st 13.7. Computational Methods 13.8. Exotic Options 13.9. Storage Costs and Dividends 13.10. Martingale Pricing 13.11. Summary 13.12. Exercises 13.13. References 14. Interest Rate Derivatives 14.1. Examples of Interest-Rate Derivatives 14.2. The Need for a Theory 14.3. The Binomial Approach 14.4. Pricing Applications 14.5. Leveling and Adjustable-Rate Loans 14.6. The Forward Equation 14.7. Matching the Term Structure 14.8. Immunization 14.9. Collateralized Mortgage Obligations 14.10. Models of Interest Rate Dynamics 14.11. Continuous-Time Solutions 14.12. Summary 14.13. Exercises 14.14. References IV. General Cash Flow Streams 15. Optimal Portfolio Growth 15.1. The Investment Wheel 15.2. The Log Utility Approach to Growth 15.3. Properties of the Log-Optimal Strategy 15.4. Alternative Approaches 15.5. Continuous-Time Growth 15.6. The Feasible Region 15.7. The Log-Optimal Pricing Formula 15.8. Log-Optimal Pricing and the Black-Scholes Equation 15.9. Summary 15.10. Exercises 15.11. References 16. General Investment Evaluation 16.1. Multiperiod Securities 16.2. Risk-Neutral Pricing 16.3. Optimal Pricing 16.4. The Double Lattice 16.5. Pricing in a Double Lattice 16.6. Investments with Private Uncertainty 16.7. Buying Price Analysis 16.8. Continuous-Time Evaluation 16.9. Summary 16.10. Exercises 16.11. References A. Basic Probability Theory A.1. General Concepts A.2. Normal Random Variables A.3. Lognormal Random Variables B. Calculus and Optimization B.1. Functions B.2. Differential Calculus B.3. Optimization
Review
Advance Praise
"Options and continuous-time finance are important enough to warrant a whole course in MBA programs. David Luenberger's book makes continuous time finance accessible to any student who has mastered elementary calculus and probability theory, and motivates the subject by using it to solve a broad range of option-type problems relating to stock, bond, and commodity markets." -- Jack Treynor, President, Treynor Capital Management, Inc.
"This textbook takes a refreshing approach to the science of investing. It is extremely well-written. Financial principles and ideas are laid out clearly and in an orderly fashion. The proofs to theorems are elegant yet intuitive." -- Joseph Cherian, Department of Finance, School of Management, Boston University
"Investment Science is a wonderful textbook treatment of investment theory for the quantitatively-minded undergraduate or masters student. This book is typical of David Luenberger's uncanny way of simplifying complex technical material without loss of rigor. He divides and conquers the subject, starting with the basics of simple fixed-income securities, and building up to the valuation and hedging of derivative securities in a dynamic setting under uncertainty. There is a lovely interplay of arbitrage calculations, portfolio selection for individual investors, and market equilibrium. The book will be especially valuable for those entering the subject from other quantitative fields."--Darrell Duffie, Stanford University Graduate School of Business
"The book is very clearly written and introduces advanced concepts (e.g. duration and convexity of bonds) in relatively simple and intuitive ways early in the book. There are lots of carefully thought out examples to illustrate important points and applications of particular methodologies. Overall, the book does a great job of taking a reader who knows essentially nothing about finance from very basic concepts up through rather advanced valuation topics." -- James E. Hodder, University of Wisconsin-Madison
"This text is a breakthrough in the organization of very important theory." --Lloyd Nirenberg, Director, Business Development, National Semiconductor Corp.
"This book provides great insights and practical approaches for anyone interested in the relation between markets and decisions. It is written in a unique and creative manner." --Nick V. Arvanitidis, CEO,IDEA GmbH., and Former CEO, Sequus Pharmaceuticals
"Luenberger's book is very informative and offers genuinely new insights into important investment problems."--Paul McEntire, Chairman, Skye Investment Advisors LLC
"Professor Luenberger's book, particularly Chapters 15 and16, lays the foundation for the analytic approach Enron takes when assessing and managing risk in its non-traded asset portfolio."--Andrea Vail, Vice President, Enron Capital Management
"Professor Luenberger's book provides a well written and readable introduction to several important areas in financial engineering. The sections on derivatives are very useful. This book will be great for quantitatively oriented MBAs. Another important audience is those students with advanced quantitative training, but little formal economics or prior finance."--Dr. Aram G. Sogomonian, Corporate Vice President, Risk Management, Edison Source
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