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Read, “How to Analyze a Pharmaceutical Company” on page 158 in Fundamentals of Investment Management by Hirt.Write a brief one (1) page paper on analyzing a pharmaceutical company.
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Tenth Edition
The tenth edition has been reorganized to include material on behavioral
finance, a much larger section on portfolio management, and a completely new
chapter covering private equity and hedge funds. A great deal of new material
related to the financial crisis has also been added to the text, including topics
such as the subprime mortgage market, credit default swaps, Federal Reserve
policy, and much more.
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Tenth Edition
FundAmenTAlS oF
InveSTmenT
mAnAGemenT
Hirt
Block
Geoffrey A. Hirt
Stanley B. Block
MD DALIM #1144375 05/09/11 CYAN MAG YELO
To learn more about the tenth edition and the resources available to you,
please visit www.mhhe.com/hirtblock10e.
FundAmenTAlS oF
Presenting applied theory alongside real-world examples, Fundamentals of
Investment Management provides a survey of the important areas of investments:
valuation, the marketplace, fixed income instruments and markets, equity
instruments and markets, derivative instruments, and a cross-section of
special topics, such as international markets and mutual funds. The text is
user-friendly, but makes no concessions to the importance of covering the
latest and most important material for the student of investments.
InveSTmenT mAnAGemenT
Moving at the speed of investments
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Contents
F U N D A M E N TA L S O F
investment
management
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Contents
McGRAW-HILL/IRWIN
SERIES IN FINANCE, INSURANCE AND REAL ESTATE
Stephen A. Ross
Franco Modigliani Professor of Finance and Economics
Sloan School of Management, Massachusetts Institute of Technology
Consulting Editor
Financial Management
Block, Hirt, and Danielsen
Foundations of Financial Management
Fourteenth Edition
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Principles of Corporate Finance
Tenth Edition
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Principles of Corporate Finance,
Concise
Second Edition
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Finance: M Book
First Edition
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Cases in Finance
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Grinblatt (editor)
Stephen A. Ross, Mentor: Influence
through Generations
Grinblatt and Titman
Financial Markets and Corporate
Strategy
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Analysis for Financial Management
Tenth Edition
Kellison
Theory of Interest
Third Edition
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Corporate Finance
Ninth Edition
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Corporate Finance: Core Principles and
Applications
Third Edition
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Essentials of Corporate Finance
Seventh Edition
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Financial Analysis with an Electronic
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A Risk Management Approach
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Financial Markets and Institutions
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International Finance
Eun and Resnick
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Robin
International Corporate Finance
First Edition
Investments
Bodie, Kane, and Marcus
Essentials of Investments
Eighth Edition
Bodie, Kane, and Marcus
Investments
Ninth Edition
Hirt and Block
Fundamentals of Investment
Management
Tenth Edition
Hirschey and Nofsinger
Investments: Analysis and Behavior
Second Edition
Jordan, Miller, and Dolvin
Fundamentals of Investments: Valuation
and Management
Sixth Edition
Stewart, Piros, and Heisler
Running Money: Professional Portfolio
Management
First Edition
Sundaram and Das
Derivatives: Principles and Practice
First Edition
Financial Institutions and Markets
Rose and Hudgins
Bank Management and Financial
Services
Eighth Edition
Rose and Marquis
Financial Institutions and Markets
Eleventh Edition
Real Estate
Brueggeman and Fisher
Real Estate Finance and Investments
Fourteenth Edition
Ling and Archer
Real Estate Principles: A Value
Approach
Third Edition
Financial Planning and Insurance
Allen, Melone, Rosenbloom,
and Mahoney
Retirement Plans: 401(k)s, IRAs, and
Other Deferred Compensation
Approaches
Tenth Edition
Altfest
Personal Financial Planning
First Edition
Harrington and Niehaus
Risk Management and Insurance
Second Edition
Kapoor, Dlabay, and Hughes
Focus on Personal Finance:
An Active Approach to Help You
Develop Successful Financial Skills
Third Edition
Kapoor, Dlabay, and Hughes
Personal Finance
Tenth Edition
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Contents
F U N D A M E N TA L S O F
investment
management
10e
Geoffrey A. Hirt
Stanley B. Block, CFA, CMM
Professor of Finance
DePaul University
Professor of Finance and Holder of the
Stan Block Endowed Chair in Finance
Texas Christian University
iii
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FUNDAMENTALS OF INVESTMENT MANAGEMENT, TENTH EDITION
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc.,
1221 Avenue of the Americas, New York, NY 10020. Copyright © 2012 by The McGraw-Hill
Companies, Inc. All rights reserved. Previous editions © 2008, 2006, and 2003. No part of this
publication may be reproduced or distributed in any form or by any means, or stored in a
database or retrieval system, without the prior written consent of The McGraw-Hill Companies,
Inc., including, but not limited to, in any network or other electronic storage or transmission,
or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers
outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 RJE/RJE 1 0 9 8 7 6 5 4 3 2 1
ISBN 978-0-07-803462-6
MHID 0-07-803462-0
Vice President & Editor-in-Chief: Brent Gordon
Vice President and Director Specialized Publishing: Janice Roerig-Blong
Publisher: Douglas Reiner
Sponsoring Editor: Michele Janicek
Marketing Manager: Melissa Caughlin
Editorial Coordinator: Kaylee Putbrese
Project Manager: Melissa M. Leick
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Cover Designer: Studio Montage, St. Louis, Missouri
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All credits appearing on page or at the end of the book are considered to be an extension of the
copyright page.
Library of Congress Cataloging-in-Publication Data
Hirt, Geoffrey A.
Fundamentals of investment management / Geoffrey A. Hirt, Stanley B. Block.—10th ed.
p. cm.—(The McGraw-Hill/Irwin series in finance, insurance and real estate)
ISBN 978-0-07-803462-6 (hardback)
1. Investments. 2. Investments—United States. 3. Investment analysis. I. Block, Stanley B.
II. Title.
HG4521.H579 2011
332.6—dc22
2011009720
www.mhhe.com
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dedication
To Michele Janicek, our executive editor at McGraw-Hill, who has supported us
throughout the years with good advice, a dedicated staff, and much patience.
—Geoffrey A. Hirt, Chicago
Stanley B. Block, Ft. Worth
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Contents
about the authors
Geoffrey A. Hirt Dr. Hirt is currently Professor of Finance at DePaul University.
He received his PhD in Finance from the University of Illinois at Champaign-Urbana,
his MBA from Miami University of Ohio, and his BA from Ohio-Wesleyan University.
Geoff directed the Chartered Financial Analysts Study program for the Investment
Analysts Society of Chicago from 1987 to 2001.
From 1987 to 1997 he was Chairman of the Finance Department at DePaul
University and teaches Investments and Managerial Finance at DePaul. Dr. Hirt is
past president of the Midwest Finance Association and former editor of the Journal
of Financial Education. He served on the Board of Directors of the Investment
Analysts Society of Chicago from 2002 to 2005 and on the editorial board of the
Journal of Investment Consulting.
From 1998 through July of 2001 Dr. Hirt was Senior Vice President for Strategy
and Planning at Mesirow Financial and also the Director of Equity Research. During
that time he represented Mesirow Financial at the Pacific Pension Institute (PPI)
and he remains a member of that organization today. During the last five years,
Dr. Hirt has moderated seminars on various investment topics at PPI Asian Roundtables in Seoul, Singapore, Tokyo, Bangkok and Hong Kong.
Dr. Hirt has been a strong supporter and director of real dollar student managed investment funds during his career. In 2010, he and his wife Linda established
a real dollar investment fund at DePaul University with a focus on international
investing.
Dr. Hirt was the recipient of the “Spirit of DePaul” award in 2006. During the
winter of 2007 he was a visiting professor at the University of Urbino in Italy,
where he continues to be involved during the summer months. He enjoys gardening, golf, swimming and all types of music.
Stanley B. Block Professor Block teaches financial management and investments
at Texas Christian University, where he received the Burlington Northern Outstanding Teaching Award and the M. J. Neeley School of Business Distinguished Teaching
Award. His research interests include financial markets, mergers, and high-yield
bonds. He has served as President of the Southwestern Finance Association and is
a Chartered Financial Analyst and a Certified Cash Manager. He enjoys sports and
has run the NY Marathon. Professor Block holds a BA from the University of Texas
at Austin, an MBA from Cornell University, and a PhD from LSU.
In 2001, his former students established the Dr. Stan Block $1.5 million Endowed
Chair in Finance at Texas Christian University. He is the first chairholder of the
named chair. In 2006 Professor Block was selected as the “University’s Most Outstanding Professor.”
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preface
Contents
vii
Many changes have taken place in the financial markets since the first edition of
Fundamentals of Investment Management was published in the early 1980s.
However, the one constant has been a sincere commitment within this text to
capture the excitement and enthusiasm that we feel for the topic of investment
management.
Throughout the book, we attempt to present applied theory alongside realworld examples that illustrate the theory. Our goal is that by the time conscientious
students complete an investment class using this textbook, they will be able to manage investments in the real world. We approach financial analysis the way it is done
by many Wall Street firms. Geoff Hirt directed the CFA program for the Investment
Analysts Society of Chicago (now the CFA Institute of Chicago) for 15 years and sat
on the board of directors from 2002 to 2005. Stan Block has been a practicing CFA
for over 20 years. Both of us have taught and advised student-managed investment
funds at our universities and we bring this wealth of learning experience to the
students who study from this text.
Both of us manage diversified portfolios. We are close to the markets on a daily
basis and keep abreast of major developments in the economy, market structure,
and globalization of the markets. Above all else, we have written a text that is userfriendly, but make no concessions to the importance of covering the latest and
most important material for the student of investments.
KEY UPDATES TO THE TENTH EDITION
Organization
Perhaps the most significant change is our reorganization of the book for the tenth
edition. We have added material on behavioral finance, and created a much larger
section devoted to portfolio management, including a new chapter titled Alternative Investments: Private Equity and Hedge Funds. The last section of the book
now includes the chapter on introductory theory and portfolio management, followed by chapters on duration and bond portfolio management, international
investing, real assets, alternative investments, and measuring investment performance. Further reorganization of the chapters is as follows:
Part 1: We eliminated Chapter 4, formerly titled Investment Information.
Today’s students are very adept at finding information on the Internet, and many
university libraries have electronic data accessible to the students from their home
computers. We also have many Web links throughout the text, and we believed the
space could be better used for more important material. In this instance, we moved
the mutual fund chapter up from Chapter 18 to Chapter 4. This fits with the investing goals and objectives covered in Chapter 1, and also meshes with the stock
market index material in Chapter 2. We also added to this chapter more information about exchange-traded funds.
Part 2: Chapters 5 through 8 have been our mainstay for financial analysis:
economics, industry analysis, company valuation, and financial statement analysis.
All material in these chapters has been extensively updated with refreshed examples. Chapter 7 has been reorganized and expanded to make the content more
understandable for the student.
Part 3: Chapters 9 and 10 have been swapped. The chapter that deals with
anomalies is now Chapter 9, as we thought it made more sense to have that chapter follow the section on fundamental analysis that we cover in Part 2. The former
Chapter 9, A Basic View of Technical Analysis, is now Chapter 10, Behavioral
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Preface
Finance and Technical Analysis. We have added introductory material on behavioral finance to the beginning of this chapter and have tried to show where technical analysis may in fact be trying to interpret some of the behavior we observe in
investors.
Parts 4 and 5: Part 4 includes three chapters on bonds. Former Chapter 13 has
been moved to Part 6 and is now Chapter 18. Part 5 includes three chapters on
derivative instruments. Except for the move of former Chapter 13, both parts retain
most of the organization of the last edition.
Part 6: As described earlier, Part 6 now includes all discussion of portfolio
management, including a new chapter on private equity and hedge funds. All in
all, we feel that moving some of the formerly earlier chapters into the portfolio
section here made more sense than having them stand alone. In a portfolio context, these chapters combine to create a view of a diversified portfolio, and in the
reordering of the chapters we tried to include more data on how these assets
impact risk and return on a pure stock and bond portfolio. In the end we have
collected together the asset classes of stocks, bonds, international securities, real
estate and real assets, hedge funds, and private equity. These are the asset classes
that are most often used by institutional investors to achieve a better risk-return
trade-off than just a stock and bond portfolio.
Chapter Changes
Common Changes to All Chapters A great deal of new material has been
added throughout the book. Although the financial crisis is fresh in our minds, we
had a tough balancing act to determine just how much time we wanted to spend
on this topic. We included material where relevant, but not so much as to make the
book seem like a history book to the students. Topics like the subprime mortgage
market, credit default swaps, Federal Reserve policy, and other related topics found
their way into many chapters. In addition, tables, charts, and data have been
updated throughout the text. For a more in-depth look at the changes made to this
edition, see below, where we have highlighted chapter-specific changes.
PART ONE
Chapter 1





Added more risk categories such as tax risk, operating risk, financial risk, and
manager risk.
Contrasted defined benefit and defined contribution retirement plans.
Expanded the discussion of geometric vs. arithmetic returns, including the
mathematical equation for calculating the geometric mean.
Added new return data from the Ibbotson Classic 2010 Yearbook.
Significantly expanded coverage of the equity risk premium and its use in the
CAPM.
Chapter 2




Updated our example of an IPO with the offering by Financial Engines, a company that was started by Bill Sharpe.
Updated discussion of security markets organization to include the changes in
market structure and competition, including the BATS and ICE exchanges.
Added new Real World of Investing box on dark pools.
Expanded coverage of program trading, with more on circuit breakers, the use
of high-frequency trading, and the “flash crash.”
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Preface
ix
Chapter 3

Added a more comprehensive view of the Dow Jones Industrial Average and
discussed how this price-weighted average is calculated.
Chapter 4






Replaced sources of information material with mutual funds and included
expanded coverage of exchange-traded funds and closed-end funds.
Moved discussion on unit investment trusts from the appendix to the body of
the text.
Added new Real World of Investing box that covers socially responsible investing, including mutual funds that invest with a religious set of values. Many
religions are covered, including Catholic, Christian, Mennonite, Islamic, and
Jewish funds.
Added material on target retirement, or life-cycle funds.
Expanded coverage of mutual fund fees by asset class.
Expanded the section on measuring mutual fund performance to include the
Standard & Poor’s SPIVA scorecard, comparing actively managed funds to
index funds.
PART TWO
Chapter 5



Added information on the financial crisis and how it has affected monetary
policy as well as the fiscal policy initiatives of TARP and TALF.
Added a new Real World of Investing box with information from the Congressional Budget Office on the budgetary treatment of companies such as General
Motors, AIG, and Citigroup, now owned by the government.
Deleted the section on business cycles and industry relationships.
Chapter 6





Expanded coverage of industry life cycles to include a discussion of product
life cycles.
Replaced the old Real World of Investing box on brand names with a new,
updated box discussing what a brand name is worth.
Continued to use the pharmaceutical industry as an example throughout the
chapter, but updated all tables and charts and included a new section on
Obamacare and its implications for this industry.
Expanded the discussion of sector rotation with a theoretical model based on
Sam Stovall’s S&P Guide to Sector Rotation.
Added an appendix from Standard & Poor’s Industry Surveys regarding how to
analyze a pharmaceutical compan …
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