Articles and Links
For Chapter 2:
How Bond Guru Gross Decided to Take Swat at GE. This Wall Street Journal article talks about some of the things corporate borrowers have to deal with. Who would think the words and actions of one bond fund manager can hurt the mighty GE?
For Chapter 3:
The dot-com IPO mania is becoming history. These two WSJ stories suggest one reason why IPOs tend to be underpriced:
How CSFB Settlement Changes IPO Game
Deals & Deal Makers: CSFB Settles 'Pervasive' IPO-Profit Scheme
To better understand how investor trades are executed, how price improvement works, etc., check out this SEC's page. This Business Week article explains why payment for order flow might not be a bad thing after all.
To learn more about short selling, check out this CNNFN story.
Electronic Communication Networks (ECNs): On some of the ECN sites you can take a look inside the limit order book and watch real trading take place in real time.
For Chapter 4:
In their advertisements, mutual funds like to emphasize historical performance, while the small print says "returns are historical and are not indicative of future results." This WSJ article explains why the real historical returns are often lower than they appear.
Morningstar's star ratings affect fund selection decisions made by individual investors. This WSJ article explains how Morningstar awards its ratings.
Morningstar fund selector - a useful tool you can use to choose mutual funds. You have to register to try it but registration is free.
For Chapter 8:
In this interview Bill Sharpe, one of the creators of the Capital Asset Pricing Model (CAPM) shares his personal perspective about this model. What is the human story behind the CAPM? Is beta dead? How does CAPM compare with APT? These and many other interesting issues are discussed in simple English.
Want to find out more about the practical uses of the Arbitrage Pricing Theory (APT)? Advanced Portfolio Technologies is one of many firms that use APT.
The EMH suggests that trying to pick stocks based on public information is a futile exercise. The Wall Street Journal did an informal test of this idea over 14 years comparing the returns of stocks picked by investment professionals with those of stocks selected by throwing darts at the WSJ's stock tables. The results of the contest are discussed in this WSJ article.
This web page discusses anomalies in stock returns that seem to contradict the EMH.
In this speech George Soros, a famous investor and philanthropist, talks about his theory of reflexivity, which is in fundamental disagreement with the prevailing views about how financial markets operate.
For Chapter 10:
What happens to bonds of companies that go bankrupt? The bondholders fight for the assets of the firm. This WSJ article talks about "vulture" firms that make big bets by buying distressed debt.
Bondholders of firms like WorldCom and Global Crossing have lost billions by investing in seemingly low-risk bonds. This WSJ article talks about whether the investment bankers who organized those bond issues should have been more diligent in doing due diligence investigation of the issuers.
Corporations usually sell their newly issued bonds to large institutional investors like mutual funds and pension funds. But recently several well-known firms issued bonds intended for individual investors. This WSJ article talks about these "bonds for the little guy."
If you want to learn more about bond trading and working at a big Wall Street investment firm, this book is for you. Although it is becoming dated, Liar's Poker is still an entertaining and informative read.
For Chapter 16:
Stock options derive their value from the value of the underlying stocks. This WSJ article talks about a few cases of options trading based on inside information.
Equity can be viewed as a call option with exercise price equal to the face value of the firm's debt. This approach clarifies some of the possible conflicts between stockholders and bondholders of the firm. For example, when the firm is likely to go bankrupt the stockholders have little to lose by pursuing very risky projects if those projects increase the likelihood of their option being in the money. Such actions can hurt the bondholders. Also it turns out that the "option approach" is very helpful in evaluating default risks. For example, Moody's Investor Service, one of the leading debt rating agencies, uses options methodology in its rating methodology.
The story of the near collapse of the Long Term Capital Management hedge fund discussed in this article is an example of what happens sometimes when derivatives traders rely too much on their sophisticated models. By the way, Myron Scholes and Robert Merton, both Nobel prize winners for their work in derivatives pricing, were on the board of the LTCM.
For Chapter 17:
An online options calculator (uses Black-Scholes option pricing model).