CFA Institute Front Matter Source: Financial Analysts Journal, Vol. 40, No. 1 (Jan. - Feb., 1984), pp. 1-79 Published by: CFA Institute Stable URL: http://www.jstor.org/stable/4478708 . Accessed: 15/06/2014 18:58 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. . CFA Institute is collaborating with JSTOR to digitize, preserve and extend access to Financial Analysts Journal. http://www.jstor.org This content downloaded from 185.44.78.76 on Sun, 15 Jun 2014 18:58:18 PM All use subject to JSTOR Terms and Conditions
Transcript
CFA Institute
Front MatterSource: Financial Analysts Journal, Vol. 40, No. 1 (Jan. - Feb., 1984), pp. 1-79Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4478708 .
Accessed: 15/06/2014 18:58
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp
.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].
.
CFA Institute is collaborating with JSTOR to digitize, preserve and extend access to Financial AnalystsJournal.
http://www.jstor.org
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FINANCIAL ANALYSTS JOURNAL Editor-in-Chief CHARLES A. D'AMBROSIO, CFA Graduate School of Business University of Washington Seattle
Managing Editor JUDITH F. KIMBALL Advertising Coordinator Eloise E. Eisenhardt Production Manager Joseph W. Hollis
Advertising Representative James R. Stack & Associates, Inc. 50 East 42nd Street New York, N.Y 10017 / (212) 867-9690 James R. Stack / Marketing Manager
Editorial Board
WILLIAM H. BEAVER Stanford University FISCHER BLACK Goldman, Sachs & Co. ROBERT I. CUMMIN Lloyd Investments, Inc. PETER 0. DIETZ Frank Russell Company M. HARVEY EARP, CFA Brittany Capital Corporation STEVEN G. EINHORN Goldman, Sachs & Co. CHARLES D. ELLIS, CFA Greenwich Research Associates ROBERT FERGUSON Leland O'Brien & Rubenstein BRUCE D. FIELITZ Georgia State University H. GIFFORD FONG Gifford Fong Associates
WILLIAM L. FOUSE, CFA San Francisco GARY L. GASTINEAU Kidder, Peabody & Co. Inc. WALTER R. GOOD, CFA Continental Group, Inc. WILLIAM S. GRAY, CFA Harris Trust and Savings Bank STEWART D. HODGES London Graduate School of Business Studies IRVING KAHN, CFA Kahn Brothers & Co. Inc. MARTIN L. LEIBOWITZ Salomon Brothers Inc JAY 0. LIGHT Harvard Business School EDMUND A. MENNIS, CFA Consultant to Investment Management
RICHARD MICHAUD Lynch Jones & Ryan GORDON PYE Irving Trust Company BARR ROSENBERG BARRA JOEL R. SWANSON, CFA Morgan Guaranty Trust Company ALDEN TOEVS Morgan Stanley & Co., Inc. JACK L. TREYNOR Treynor-Arbit Associates ADOLPHE J. WARNER, CFA New York & Foreign Securities Corp. ROMAN L. WEIL University of Chicago ARTHUR ZEIKEL Merrill Lynch Asset Management
Advertising Committee: 1983-84
FRED ANSCHEL Dean Witter Reynolds Inc. KAY BREAKSTONE Burson-Marsteller HAROLD BURSON (Chairman) Burson-Marsteller M. HARVEY EARP Brittany Associates, Inc.
WALTER R. GOOD Continental Group, Inc. JACK L. KELLY Goldman, Sachs & Co. JOHN J. McCABE Bankers Trust Company FREDERICK L. MULLER Atlanta Capital Management Co.
J. KENDRICK NOBLE, JR. Paine Webber Mitchell Hutchins Inc. RONALD F. O'CONNOR Continental Illinois National Bank & Trust Co. MICHAEL G. PERREAULT Alfred Bunting & Co., Ltd. ARTHUR ZEIKEL Merrill Lynch Asset Management, Inc.
FINANCIAL ANALYSTS FEDERATION Officers: 1983-84
MAITHtAS PLUM, JR. Chairman ERNEST R. WIDMANN, CFA Vice Chairman H. KENT ATKINS, CFA Vice President JOHN L. DUGAN, JR. Executive Director Staff
MILDRED M. HERMANN Secretary-Treasurer HARRY HANSEN Director of Education and Programs PEGGY E. KELLY Manager, Member Services RUTH GOLDKLANG Staff Accountant NANCY S. RIFKIND Self-Regulation Administrator For Change of Address: Send old label and new address with Zip Code, six weeks before moving.
Board of Directors: 1983-84
H. KENT ATKINS, CFA Bankers Trust Company BERNADETTE BARTELS-MURPHY Shaw & Co. RICHARD M. BURRIDGE, CFA Alliance Capital Management
Corporation EUGENE B. BURROUGHS, CFA International Brotherhood of Teamsters LINDA H. CHERICO, CFA Valley National Corporation LEON G. COOPERMAN, CFA Goldman, Sachs & Co. JOHN L. DUGAN, JR. Financial Analysts Federation CHARLES D. ELLIS, CFA Greenwich Research Associates TOM L. HANSBERGER, CFA Templeton Investment Counsel, Inc.
C. ROSS HEALY, CFA Standard Capital Management Corp. JEANINE REIME HELLER, CFA Josephthal & Co. Inc. HILTON McCREA JERVEY, CFA Manufacturers Hanover Trust Co. FREDERICK L. MULLER, CFA Atlanta Capital Management Co. MATTHIAS PLUM, JR. EUGENE C. SIT, CFA Sit Investment Associates Inc. EDUS H. WARREN, JR., CFA Capital Research Company ERNEST R. WIDMANN, CFA Widmann, Blee & Co., Inc. GORDON T. WISE, CFA G. T. Wise & Co.
Headquarters Office: 1633 Broadway, New York, NY 10019 (212) 957-2860
The Financial Analysts Federation, founded in 1947, is a non-profit professional organization consisting of 52 Financial Analysts societies located in the major cities of the United States and Canada. These societies have an aggregate of about 14,500 members who are engaged in security analysis, portfolio management, and executive direction of the investment function. The affiliated Institute of Chartered Financial Analysts awards the pro- fessional designation of "Chartered Financial Analyst" to qualified members upon successful completion of three examinations.
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Borg-Warner submersible pumps help bring vital irrigation water 5000 feet, almost a mile, BORGS WAR~NER~ straight up from beneath arid desert sands. That's today's Borg-Warner. Diversified for financial stability. A company worth watching. iD 198
01,a gac The Demand for Capital Market Returns: A New Equilibrium Theory ..................... 22
Roger G. Ibbotson, Jeffrey J. Diermeier and Laurence B. Siegel Investors demand more of an asset, the more desirable the asset's characteristics. Investors regard these characteristics-risk, taxation, marketability and information costs, for example-as positive or negative costs, and evaluate expected returns net of these costs. The New Equilibrium Theory integrates all asset characteristics into a unified framework that is ap- plicable to all types of assets-stocks and bonds, real estate, venture capital, durables and intangibles.
A Trading Strategy for New Listings on the NYSE ............................. 34
John J. McConnell and Gary C. Sanger An examination of the stock prices of 319 companies that moved from the over-the-counter markets to the New York Stock Exchange over the period January 1966 through December 1977 reveals a definite pattern in stock price performance. This in turn suggests a potentially prof- itable investment strategy: Buy a stock when it is an- nounced that a company has filed a formal applica- tion to list on the NYSE; liquidate the long position and simultaneously sell the stock short once it has ac- tually become listed; and liquidate the short position six weeks after listing.
Accountability for Pension Fund Performance ......................... 39
Walter R. Good Overall pension fund performance may be seen as the net result of contributions from three separate sources-investment policy, portfolio manager strategy and plan-sponsor strategy. Invest- ment policy defines the asset-allocation plan that best meets the fund's long-term objectives in the absence of active management. Any significant departure from investment policy represents an exercise of investment strategy by either the plan sponsor or the individual managers.
After-Tax Investment Results from Long-Term vs. Short-Term Discount Coupon Bonds ............. ............... 43
Richard Roll The fraction of a bond's total return sub- ject to favorable capital gains tax treatment declines, the longer the bond's original maturity. Thus, given the same pretax yields on long and short-maturity bonds, it is better, at most coupon levels, to roll over short-term bonds. Even though purchase of the longer bond would postpone the capital gains tax payment,
FINANCIAL ANALYSTS JOURNAL I JANUARY-FEBRUARY 1984 O 4
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a larger fraction of the short-term bond's total return comes in the form of capital gains. This suggests a reason why pretax yields are higher on long-term bonds: They must compensate for the higher rate of effective taxation.
In Defense of the Consensus Decision...... 55 Robert Tattersall The group decision has, deservedly or not, a bad reputation. But psychological studies show that group efforts can result in solutions that are superior to any individual contribution. Better quali- ty decisions result when groups avoid the easy, con- sensus decision; encourage dissenting opinions; and stick to the issues, rather than the personalities, involved.
The P/B-ROE Valuation Model ......... *.. 58 Jarrod W. Wilcox A valuation model based on expected growth in book equity, the P/B-ROE model is useful in practice because historical return on equity is a fairly good predictor of future return on equity and because the statistics required to estimate the relationship are simple. The P/B-ROE model appears to be superior to price-earnings ratio models and allows estimation of investment horizon, required shareholder return and market consensus expected return on equity using historical data.
Variable Rate Mortgages ................. 67 Alan C. Hess In an effort to reduce their exposure to interest rate risk, financial intermediaries have in- troduced variable rate mortgages. In effect, variable rate mortgages transfer interest rate risk from in- termediaries to households. Because households are not as efficient in managing risk as intermediaries, this transfer increases the price of risk-bearing in the economy as a whole.
Using the COMPUSTAT Tapes in Financial Research: Problems and Solutions ........................* 71
Robert B. McElreath, Jr. and C. Donald Wiggins Among the criticisms directed at studies that use the COM- PUSTAT tapes or other computerized data bases are that the tapes contain erroneous data and that research results are biased because the studies tend to include only firms that have been in existence over a specified period. Because even small error rates can have a significant impact on results, researchers should at- tempt to detect errors through statistical methods. Fur- thermore, to counter the effects of the "survivorship bias" problem, they may have to include delisted firms in their sample.
Securities Law and Regulation After Dirks John G. Gillisl.1
Pension Fund Perspective Crosscurrents in the Pension Picture Patrick J. Regan .................................... 15
Microcomputer Perspectives Relational Data Base Management Systems William F. Sharpe .................................. 18
A Message from the Publisher John L. Dugan, Jr . ................................... 6
Karl Leubsdorf Memorial Fund Grant ....... 21
Letters ................................. 80
FINANCIAL ANALYSTS JOURNAL? is published bi-monthly by The Financial Analysts Federation, a non-profit corporation devoted to the advancement of investment management and security analysis. Neither the Federation nor its publication's editorial staff is responsible for facts or opinions contained in articles therein. Copyright'? by The Financial Analysts Federation, 1984. Printed in U. S. A. Articles may be reprinted only by permission of the Editor. Indexed in the Business Periodicals Index. Second class postage paid at the Post Office at New York, N.Y. and additional offices. SUBSCRIPTIONS. Domestic: one-year $36, two-year $63, three- year $81, single copy (prepaid only) $6.75; Outside U.S.A.: one-year $39, two-year $66, three-year $84, single copy (prepaid only) $9. 1 0 (Europe), $9.65 (Asia, Africa, Far East). Copies will be airmailed to foreign subscribers at their request. They will be required, however, to prepay airmail postage (currently $5. 10 per copy to Europe and Japan).
For Change of Address: Send old label and new address with Zip Code, six weeks before moving.
REPRINTS of articles published in the Journal are available at a nominal cost. Paynment must accompany orders of $ 1 0 or less. Address requests to Reprint Department, FAJ.
Vol. 40, No. 1 : Jan. /Feb. 1984
Address all communications to: 1633 Broadway, New York, N. Y. 10019 (212) 957-2866
FINANCIAL ANALYSTS JOURNAL / JANUARY-FEBRUARY 1984 O 5
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TEMPLE-INLAND. THE NEW, $1.3 BILLION GIAT THA'S GROWING IN ALL THE RIGHT PLACES. _^;, Temple-Inland is a new fiber, much of it harvested from our lent position to capitalize on the
name with an impressive own forests. About two-thirds of market's expanding needs -what- , past and a bright future. It's the raw material used in our un- ever form they take.
the union of two successful bleached paperboard (principally Financing the American Dream. P forest products companies: kraft linerboard) is virgin fiber. The Temple-Inland helps finance many
Temple-Eastex Inc. and Inland remainder comes from plentiful old of the homes which it helps build. Container Corporation, corrugated boxes. This flexibility of Lumbermen's Investment Corpora-
formerly subsidiaries of Time Inc. supply assures steady production in tion, our mortgage banking subsidi- Together, they form a diversified a sometimes volatile industry-and ary, currently services a $2.4 billion giant that's growing strong with the helps make us one of the most portfolio of real estate loans. And right products in the right places. efficient producers in the business. it's growing fast. The portfolio has Over 2 million acres in the sun. A major packaging company. - more than doubled over the last Temple-Inland and our half-owned With our network of 28 corrugated five years. affiliate, Georgia Kraft Company, box plants nationwide, we serve And insuring thousands of have over 2 million acres of prime virtually every kind of corrugated Americans. southern timberland located at the packaging customer- from beef Our Great American Reserve doorstep of America's fastest- packers to computer makers. And Insurance Company currently has growing Sun Belt markets in Texas, our bleached folding carton plants over $3 billion of life insurance Georgia and Alabama. The result: are strategically located to service in force. significant cost advantages over consumer packaging markets. At Temple-Inland, the belief that competitors with forests in the Helping build the growing Sun Belt.- good, strong growth must be Northwest. Our building products are manufac- nurtured has resulted in over A leader in the fastest-growing tured and primarily marketed in the 50 consecutive, profitable years. paper markets. South and Southwest, where the And in the last five, we've invested Many experts are predicting that in population is migrating and demand over $750 million in capital expend- the coming years, the most profit- is greatest. And because we offer itures to lay a sound foundation for able paper grades will be bleached one of the most diversified product future growth. and unbleached paperboard, and lines available, we are in an excel- In early January, Temple-Inland we are a large, low-cost producer of begins trading on the New York each. Last year, we manufactured 'YE 13n, Stock Exchange under the symbol, over 1.7 mi1ion tons of paperboard. - 1 N t(. _ "TIN".For information on the A plentiful supply of virgin fiber A FOREST PRODIUC'TS COMPANY newest growth company on the big and recycled raw material. board, write Tom Sumner All of the raw material used at Treasurer, Temple-Inland Inc., our bleached paperboard Drawer N, Diboll,
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CSX Corporation is poised for strong growth in 1984.
Chessie System Railroads The recent merger with Texas Gas Resources not nonly increased CSX's total 5" ~~~~~~~~~~~~~~~assets by $2 billion, it's also a
Seaboard System Railroad sound example of growing ^ ~~~~~~~~~~~~~~where your strength lies.
CSX's energy interests ~~~~~~~~ ~~~~~~~already include 1.3 billion
Texas Gas Resources tons of coal reserves, and Chessie System Railroads. Seaboard System coal accounts for one-third Railroad and Texas Gas Resources are major rof rilc ;1r<TO unitsoatCSX Corporation c 1984 CSXCorporation it re lLl venue-s .
And with the Texas Gas
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CSX Builds For The Future With Innovations In Transportation, A Broader Base Of Natural Resources, And Over $10 Billion In Assets.
I
- + j~~~~~~~~~~~~4
I p
6,000-mile pipeline trans- porting natural gas to supply the Southeast, Mid- west and Northeast, CSXs growth strategy is on target.
For the CSX railroads, one of the keys to growth is the strength found in their diversification.
Chessie and Seaboard systems enjoy the stability of carrying a broad range of commodities.
And, by developing
intermodal marketing initia- tives for its rail units, adding truck lines and warehousing operations, and upgrading with computerized, state- of-the-art terminals and equipment, CSX continues to grow as America's trans- portation and natural resource leader.
Write: Corporate Com- munications, P0. Box C-32222, Department F-1, Richmond, VA 23261.
CORPORATION America's Largest nlansportation
And Natural Resource Company.
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The Trustees of The Institute of Chartered Financial Analysts are pleased to announce that the following candidates were awarded the Chartered Financial Analysts designation on September 14, 1983:
ATLANTA Bowman, Kathy E. Coghlan, Jeremy M. Denney, L. Earl Jacobs, Daniel L. Lord, Thomas M. Majors, Sandra W. Miller, Carol L. Towles, Joan L.
AUSTIN-SAN ANTONIO McGlynn, James R. Ramos, Thomas G. Volio, Jose E.
BALTIMORE lannone, Anita M. Legg, Kyle P. Ober, Douglas G. Rauch, Philip J. Smith, Sally H. Splatt, Deborah A.
BOSTON Angius, Diane M. Braun, George H. Burnett, Stephanie S. Carleton, J. Terence Dobkin, Penelope A. Goggins, Barry M. Hadas, Edward S. Holt, Timothy C. Kellogg, Edmund D. Leifer, Alan J. Manchester, Laurence A. Miller, Deborah H. Smith, William N. Weiss, Frederick L. Wu, Norman N. Yoshida, Sarah Q.
CALGARY Bertram, Robert G. Ferris, Donald T. Grant, Nancy J. Mitchell, D. Grant Richardson, David W. Shushkewich, Valdine M.
CENTRAL FLORIDA Campbell, Gary D. Momand, Kurt T.
CHICAGO Anderson, Georgene N. Bronson, James W. Conlin, Thomas J. Drabik, M. Jan Harper, H. Mitchell Hays, David W. Lewis, Paul B. Linehan, David J.
Peckenpaugh, David R. Schnarsky, David J. Spitz, Rita J. Streed, Robert N. Szerszen, Karen C. Urbaszewski, Kenneth T.
CINCINNATI Berghausen, James D. Carlson, Kathleen A. Reynolds, James B.
CLEVELAND Ball, Julian C. Fulmer, Dennis S. Janus, Richard A. Pecuch, Ramon Tisch, Laurie J.
COLUMBUS Carr, Michael D. Churchill, Dwight D. De Vore, David A. Henderly, William G. Schlater, John L. Siegel, Frank W. Szente, Daniel M. Thornburgh, Jane Ann Weber, Jeffrey L.
DALLAS Bagby, David R. Bowen, William M., IV O'Donnell, James A. Stewart, Kevin M.
DENVER Cook, William S. Hanson, Janice C. Nielsen, John S.
DES MOINES Bish, David A. Hovey, James K. Kensinger, Stephen M. Seevers, David A.
DETROIT Allen, Laurence G. Christie, Peter M. Clawson, S. Dennis Giuliani, Francis L. Kennedy, Peter W. Legoullon, L. Louis Richardson, David G. Rock, Ann W. Winneke, Gregory J.
HARTFORD Dunton, Gary C. Lawton, Philip N., Jr. Mathews, Shaun P. O'Brien, Kevin J.
Odlum, Michael G. Strathearn, Michael C. Sullivan, Brenda J. White, Kenneth B.
HOUSTON Barker, Donald W. Bigelow, Ellis S. Buescher, Margaret M. Jackson, Richard S. McLean, Anna A. Moy, David K. Pustka, Nancy E.
JACKSONVILLE Ridgway, Melvin V.
KANSAS CITY Dow, Paul A., II Dyches, Kevin J. Perdue, Don R. Troutman, Conaught M. Williams, Joseph C., III Winkle, Michael A.
LOS ANGELES Ceaser, Ellen J. Harker, Ilene S. Heredy, Laszlo G. Huyser, Randall S. Krueger, Donald M. Nelman, Leslie D. Smith, Eric T. Williams, Susan J.
LOUISVILLE Albrink, Frederick H. Kinsman, James M., Jr. O'Neil, Charles M. Rogers, Jacqueline M.
MEMPHIS Sharp, Wayne S. Turner, Roy C., III
MILWAUKEE Anderson, Robin L. Armbruster, James W. Ebsen, John C. Grinney, James R. Harkness, J. Scott, III Herrmann, Susan M. Johnson, Clarke C. King, Thomas S. Schade, Michael E. Schrimpf, Carl J. Schulz, David W. Spear, Marlyn J. Stanek, Mary E.
MONTREAL Caty, Claude
Demontigny, Jean-Pierre Gewurz, Joshua Gibara, Germaine Guilbault, Gerard R. Harrison, Peter T. Hiscock, Russell J. King, Claude G. Lavallee, Mario Y. Ligon, Robert B., Jr. Mayer, Pierre Michaud, Jean Wait, Mark A. E.
NEW ORLEANS Burns, Michele A. McConnell, Diane R.
NEW YORK Achenbach, L. John, II Aird, Robert B. Ammerman, Robert C. Anderson, Anne K. Appert, Peter P. Bain, John S. Beloff, Stephen R. Billy, Richard C. Buchwald, Richard E. Burke, Susan K. Campbell, Robert J. Clayman, Michelle R. Corrado, Joseph M. Dec, Walter T. Doll, Robert C., Jr. Dufresne, Donald D. Edwards, George W., III Efron, Eric M. Ferrier, David T., Jr. Frank, Jonathan M. Frost, Norman C., Jr. Gerken, R. Jay Gutkowski, Stephen J. Haboucha, Farha-Joyce H. Harvey, Robert E. Hawk, David Q. Ide, Masasuke Jacobi, Allen A. Jaeger, Clayton N. F. Janson, Michael M. Joseph, Susan L. Kalmes, Kathleen J. Kennedy, James A. C., III Kobel, Robert J. Kritzman, Mark P. Leuffer, Frederick P., Jr. Love, James R. Lydecker, John C. Martin, Carlton N. Matthews, Jeffrey L. McElroy, William K. Meric, Albert L., Jr. Morten, Elisabeth S. Nevler, James M.
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5'5 Noll, Daniel E. Okamoto, Kazuhisa Pedrotti, Julie M. Pinto, Kevin M. J. Preston, Margaret J. Puglisi, Kenneth F. Pyne, John S. Shannon-Roche, David C. Shaw, Warren E. Sheer, Joseph M. Southworth, Larry W. Stanley, John H. Ujiie, Junichi Vale, Judith M. Walthausen, John B. Waterworth, Catherine L. Wetherhold, John M. Wolf, Thomas D.
NORTH CAROLINA Ham, Michael J. Kluttz, Robert H. Shyloski, Barbara B. Whitworth, Horace P., II
OMAHA-LINCOLN Lester, William W. Riddle, Timothy J.
PHILADELPHIA Gorman, William H., III Heilig, William W. Kern, Douglas G. Mander, Linda S. Momjian, Lucy S. G. Parr, Gary W. Quattrone, Charles J., Jr. Rattmann, Thomas E. Schildt, Kevin C.
PHOENIX Ferguson, Richard A.
PITTSBURGH Conley, Jonathan C. Davis, Ralph J. Dawson, William D. Koble, Wayne M. Lazzara, Craig J. Melvin, Gregory M. O'Toole, John R. Ramamurti, Aruna S.
PORTLAND Schue, David J.
PROVIDENCE McCabe, Joseph E. Von Hemert, David
RICHMOND Bruce, John T. Peters, P. Barton Ziglar, Linda A.
ROCHESTER Bayer, Alice E. DeVoe, Christopher H.
SAINT LOUIS Bernstein, Robert N. Taylor, Richard W.
SALT LAKE CITY Misener, Kent A.
SAN DIEGO Colombo, Carl J.
SAN FRANCISCO Distad, David C. Donegan, Susan A. Morse, Susan S. Murtaugh, Margot T. Olivier, Kenneth E. Pawlakos, Peter F. Weber, Vicki L.
SEATTLE MacLaren, Darcy S. Patterson, Mary Jane
SOUTH FLORIDA Alvarez, Maria T.
TORONTO Ambrose, John G. Anderson, Christopher J. Aust, Electa M. Belanger, Francine Bertram, Andrew J. Burton, Frederick D. Campbell, Richard A. Carl, Richard G. Doak, James C. Fyfe, Ian Gallimore, Michael J. Gay, Robert W. Gibson, Robert W. Hale, Timothy S. Henderson, Lois J. Lassonde, Pierre MacLean, Allaster G. Mahmoodallah, Mohammed A. Morrison, Robert J. Papanek, Camille D. Pearce, Glen M. Plexman, Robert D. Quirin, George D. Reid, Michael A. Ritchie, Patricia A. Ritchie, K. Heather Rogers, Paul D. Squires, Clark A. Steeves, Michael A. Tate, Jonathan C. H. Taylor, Barbara L. Vikmanis, Kristine L.
TWIN CITIES Bailey, Jeffery V. Cochrane, Richard J. Coleman, Patrick M. Crabtree, Ben B. Diehl, Richard A. Garbisch, Michael W. Griebenow, John N. Hansen, Heidi A. Hedberg, Douglas P. Hollnagel, Michael J. Hoxmeier, Theodore R. McCown, Kirk Nierengarten, Melvin P.
Smith, Bruce R. Stranghoener, Lawrence W. Tatera, James P. Young, Robin R.
WASHINGTON Blalock, Sherrill L. Bolger, Timothy J. Buscemi, Barnard A. Cole, Roger T. Erickson, Mary K. Hendori, Shawn M. Keith, Cynthia L. Klein, Robert M. Mackey, Peter B. Mulligan, Eugene W. Neale, Thomas P. Shaner, Wayne H. Shannon, Daniel G. Sieminski, Adam E.
WESTERN MICHIGAN Leonaid, J. Russell Vander Molen, Craig A.
WILMINGTON Hargrove, David R. Klopping, Martin L.
WINNIPEG Battershill, Judith A. Lovatt, William W. McIntosh, James G. Pratt, Jacqueline A.
NO CURRENT SOCIETY Altschuler, Alan Ashton, Mark D. Bailey, J. Elliott Burns, Denise Moretti Clifford, Jane E. Cohen, Henry Connelly, Frances M. Deprospero, Michael S. Driscoll, Michael 0. Eckenfelder, Lawrence W. Fairman, Fleur E. Forrester, Bonnie L. Fosnes, Margot L. Gabriel, Laurie A. Giardina, Joan M. Goebels, Frank J., III Golly, Albert J., Jr. Gribeauval, Raynal P. Haas, Edward V. Haller, Carl T., III Hart, John F. Hilmer, Steven F. Jackson, Jane L. Jacobson, Catherine L. Leight, K. Adam Lothrop, Howard J. Mallia, Katherine M. Mangin, T. Jeffrey Masi, Thomas A. McCoy, Harold V., Jr. McDonald, Robert G. Nakamoto, Ian K. Ogg, Maris A. Ognar, Ronald C.
Paone, Louis A. Pike, Dwight A. Press, David B. Quintero, Ronald G. Raley, Marcia Reese, Stuart H. Reese, Stanley H. Rohn, Jeannette C. Shintay, Peter J. Smart, Stephen H. Somoza, Carolina Strangfeld, John R., Jr. Tibbals, David D. Traba, Michael P. Weston, Michael M. White, William D. Wilkinson, Mary V. Wood, Diane E. Zurack, Mark A.
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Through the futures markets. As a recognized leader in futures markets, Goldman Sachs:
* Provides a team of professionals to serve institutions, corporations, individuals and traders in stock index, interest rate, petro- leum, currency, metal and grain futures.
* Combines preeminent knowledge of the securities markets with expertise in the futures markets to develop futures trad- ing strategies for our clients.
? Assists clients in developing stock index futures strategies through our sales professionals.
* Is in the forefront of the new options mar- kets... including options on futures, stock indexes, foreign exchange and debt securities.
Market leadership that Goldman Sachs clients expect. And profit by.
Member SIPC
New York Boston Chicago Dallas Detroit Houston Los Angeles Memphis Miami Philadelphia St. Louis San Francisco London Hong Kong Tokyo Zurich
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Today's stock market is the most volatile in history. The
higher highs, lower lows and sud- den reversals offer both risk and opportunity-risk to the investor with a porffolio to protect, and opportunity to the active trader.
Now traders and investors alike have a versatile new tool- stock index futures-that allows them to take advantage of move- ments of the broad market. For the
first time, you can translate mar- ket opinion into market action with- out having to select individual stocks.
The first stock index futures were introduced in February 1982. Since then, they have be- come one of the most actively traded futures contracts in America. For futures, and stock and options traders, and for both individual and institutional in- vestors, stock index futures are
simply too important to ignore. So here's a brief introduction:
what they are, how to use them for profit or protection, and how Merrill Lynch can help you use them more effectively.
A futures contract is simply a standardized, exchange-traded contract to buy or sell a fixed amount of a specific asset, at a
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predetermined future date, for a currently determined price.
Stock index futures are a little different from other futures, in that there is no physical underly- ing asset. Traders simply partici- pate in the overall performance of the stock market as measured by an index of stock prices.
Futures are currently traded on the New York Stock Exchange Composite Index, the Standard & Poor's 500 Index, and the Value Line Composite Index. Each has its own distinct characteristics and is traded on a registered ex- change; a Merrill Lynch Account Executive can explain the simi- larities and differences.
In most ways, however, stock index futures are similar to other futures contracts.
The initial margin required- which is a good faith deposit rather than the traditional margin familiar to securities traders-is approximately 10% of the con- tract value.
This high degree of leverage can generate substantial profits or
losses from relatively small price changes, which can happen very quickly. Because of the risk, stock index futures are not suitable for everyone; you should be aware of-and be able to assume-the financial risks.
You can withdraw any profits in excess of your initial margin any time you like. If the value of your contract falls too low, you must restore your account to its initial margin level.
Stock index futures offer traders a solution to a frequent dilemma: that it's all too common to be right on the market and wrong on the stocks you pick.
Now you can participate in the direction of the broad market, without having to select a single stock. That means futures traders can trade the stock market with an instrument they understand. Stock and options traders can trans- late market opinions into action.
Investors can achieve some protection of their stocks against an overall market decline or at- tempt to increase the rate of re- turn on their portfolios. For example, investors who are con- cerned about a possible near-term market decline can protect their portfolios without having to sell their stocks, by selling stock index futures.
Investors anticipating an up- turn but awaiting funds to buy stocks can participate in the movement by buying stock index futures. Similarly, investors who have not yet made their stock selections can still participate in an expected market rally and attempt to increase the rate of return on their portfolio by buy- ing stock index futures.
U Although stock index futures
are a relatively new instrument, Merrill Lynch has already devel- oped considerable expertise that can help you use them to your advantage.
The Merrill Lynch Stock
Index Futures Research Report provides both technical analysis from our Securities Research Division and recommended trad- ing strategies developed by our Futures Research Division.
Our market analysts and floor specialists in stock index futures keep Merrill Lynch Account Ex- ecutives continually abreast of significant events with timely market updates throughout every trading day.
A Merrill Lynch Account Executive can show you how best to use stock index futures to your advantage. And our financial re- sources and years of service to our customers provide a reassuring background of strength and in- tegrity.
The Merrill Lynch Guide to Stock Index Futures provides an excellent introduction to this ex- citing new market. The 32-page brochure includes a concise de- scription of the mechanics of fu- tures, the difference between stocks and stock index futures, the nature of stock index futures, and strategies for active traders and stock investors.
- - - - - Call 01-628-7000 Mall to: Merrill Lynch International
Attn: Mr. Anthony Childe | t 27-28 Finsbury Square
London ECZA LAQ I Telex 889974. I For a free copy of The Merrill Lynch h
I Guide to Stock Index Futures, call the I toll-free number above or mail the coupon
|today.
Name I I Address S
City ~ State 7ip~
Business Phon_ I
Home Phone
Merrill Lynch customers, please write name and office address of your Account Executive.
I
I UP Copyright 1983 Merrill Lynch & Co., Inc. I Published in U.S.A. All rights reserved.
6Merrill Lynch A breed apart.
The Aritimetic of Stock Index Futures. A specific example may clarify how leverage and volatility affect the profitability and risk of stock index futures.
The value of a contract is estab- lished as $500 tinmes the level of the index. If the index were 90.00, one contract would be worth $45,000 (90.00 times $500). The initial mar- gin to hold one such contract is set by the exchange at $3,500.
And because the value of the contract is $500 times the level of the index, each 1.00 shift in the index moves the value of the con- tract up or down $500.
For example, you buy a stock index contract today at 90.00. Later, the contract price declines to 88.50 for an unrealized loss of 1.50 points (times $500 equals $750). Then, if the price rises and the contract is sold at 92.50, you have a realized gain of 2.50 points (92.50 sale price less 90.00 purchase price), or $1,250 (2.50 points times $500). For sim- plicity, this example does not in- clude transaction costs.
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are our business. Hlow our analysts come up with them
At Drexel Burnham Lambert, we feel that conventional viewpoints don't lead to high returns.
So when our analysts begin researching, we encourage them to unfetter their think- ing. Even, sometimes, to go out on a limb.
We do it this way: a strategic direction is outlined. Then we rely on our analysts' instincts and intuition to lead them far beyond it. (After all, strategies aren't traded on the exchanges. But stocks and bonds are.)
How they come up with fresh ideas, of course, is entirely up to them. An approach that may seem a bit far out for an investment banking and securities firm. The important thing for us is: it works.
If you'd like a fresh perspective on your investment plans, maybe you should make it your business to give us a call.
W ; Drexel Burnham Lambert Your bottom line is our top concern.
60 Broad Street, New York, NY 10004 (212) 480-6000. Offices in principalfinancial centers worldwide. Copyright, Drexel Burnham Lambert Incorporated, 1984. Member SIPC.
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FRESH DAILI. Every day on Wall Street is a day of opportunities. selling the entire Big Board in a single transaction. Yet how many people actually seize the opportunities on a Investors who can correctly anticipate market trends can daily basis? now profit from the trends directly. And the potential for Most investors properly view their equities portfolios in the profit is limited only by movement in the market itself.
long term: months, years or longer. But many are now NYSE Index Futures are a highly leveraged way to learning of an equities-based product that allows them to take establish a market position or hedge an existing one. advantage of shorter-term market trends. Of course, the substantial opportunities associated with
These investors are trading NYSE Index Futures from the NYSE Index Futures entail equally substantial risks. New York Futures Exchange (a subsidiary of the New York To find out if NYSE Index Futures should be part of your Stock Exchange). investment strategy, contact your brolker or the New York
An NYSE Index Future is an equities-based product liquid Futures Exchange. enough to be held for a week, a day, an hour, or even less. 20 Broad Street, New York, N.Y. 10005. 1-800-221-7722.
Trading an NYSE Index Future is much like buying and In New York, 212-623-49249.
N.Y. FUTURES EXCHANGE
*AN NYSE INDEX FUTURE TRADED ON THE NEW YORK FUTURES EXCHANGE
U P ~~~~~~~~) ]bL
TONY DOWD. FUTURES BROKER.
NEW YORK FUTURES EXCHANGE
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"Good Stocks Don't Always Keep Pace With The Market. That's Why I Think Stock Index Futures Are An Important Tool."
-Monte Gordon, Research Director, Dreyfus Corp.
As research director for Dreyfus Corp., i one of the nation's largest mutual fund management firms, Monte Gordon knows that there's much more to stock market investing than buying and selling individual stocks:
"There's still enormous potential in the stock market. But taking advantage of it is another matter. The problem that most investors face is that even good stocks don't always keep pace with the market.
- U "That's why I think stock index futures are W. _ l an important tool. They're futures contracts
on broad market indexes, like the Standard & Poor's 500 and 100, so you can take advantage of overall movement in the market - up or down.
"Stock index futures are not a substitute for stock ownership. They're a way to leverage your capital so you can buy individual stocks ( v - v orhedgetheonesyou have."
The Chicago Mercantile Exchange's S&P 500TM and S&P 100TM contracts provide professional portfolio managers and individual investors alike with the flexibility they need to either increase opportunity or reduce risk.
For more information on the risks and rewards of trading S&P stock index futures, talk to your broker and ask for a copy of "Inside S&P Futures." He or she also can show you videotapes featuring "Wall Street Week" host Louis Rukeyser that explain the advantages of this versatile stock market tool. Or call the Chicago Mercantile Exchange, toll free, at 1-800/THE-MERC. In Illinois, call 312/930-1 000. m
Akif] ,-sE-, CHIC AGO m ..a.ZZ
MERCANTILE
X: ta '3,,-EXCHANGE
N ~~FUTURES AND OPTIONS WORLDWIDE X
~~~~~~~~~~~~~~~~30 South Wacker Drive Chicago, Illinois 60606 _
1! ~~~~~~~~~~~~~~~800/843-6372 In Illinois, 312/930-1000
__ *
~~~~~~~~~~~~~~~~Off ices in New York and London
"S&P,' "Standard & Poor's," "S&P 500," "S&P 100," "500" and "100" are trademarks of the Standard & Poor's Corporation.
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