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Capital Markets and InvestmentsEssential Insights and Concepts for ProfessionalsSiddhartha G. DastidarFirst EditionReading Light PublicationNew York

First EditionCopyright 2017 by Siddhartha Ghosh DastidarBook/ Author Website: www.columbia.edu/ sgd2002All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher, except for the use of brief quotations (not exceeding 50 words) in a book review orscholarly journal.Although the author and publisher have made efforts to ensure that the information in this book was correct at press time, theauthor and publisher do not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused byerrors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.First Printed in the United States of America in 2017Paperback ISBN 978-0-9988145-0-6Hardcover ISBN 978-0-9988145-1-3Library of Congress Control Number: 2017913083Reading Light Publications, New Yorkwww.readinglightpubs.wordpress.comSpecial discounts are available on quantity purchases by corporations, associations, educators, and others. For details,contact the author/publisher at the book website, or email at sid.readinglightpubs[AT]gmail.com.

About the AuthorSiddhartha G. DastidarDr. Siddhartha Ghosh Dastidar is an Associate Professor (adjunct) at Columbia University, and has taughtat the Graduate School of Business and the Department of Industrial Engineering & Operations Research.He teaches courses on capital markets and investments to full-time graduate and undergraduate students,and also in the executive education program.Sid has nearly two decades of experience in the financial services industry, both buy-side and sell-side, acrossasset classes and regions. As part of the Quantitative Portfolio Strategy team at Lehman Brothers and Barclays Capital in New York, he has advised large institutional clients on portfolio construction, managementand risk budgeting issues. He was also the chief US equity derivatives strategist at Newedge, part of SociétéGénérale. He is currently a risk manager in Brigade Capital, a USD18 billion credit alternatives asset manager, where he has been responsible for coming up with portfolio construction, risk and quantitativeframeworks. He has also worked in emerging market private equity for three years.Sid received a Ph.D. in Finance & Economics from Columbia Business School in New York, a MBA fromIndian Institute of Management Ahmedabad and an undergraduate degree in economics from PresidencyCollege Kolkata (both in India). He holds the CFA charter and has published in top journals such as theJournal of Financial Economics and the Journal of Portfolio Management. He has presented at the NationalBureau of Economic Research in Boston and at top universities globally. He is a member of the EconomicClub of New York.

Reader CommentsDastidar has put together a concise, very readable book covering the essentials of capital markets and investments. It nicelycovers the big three – fixed income, equities, and options – at a mathematical level that is typically just short of using calculus.But what really stands out is the very current discussion of the institutional mechanics behind the markets. Automated tradingmarkets and high-frequency traders get more than a passing mention, and Dastidar details the process of offering new securitiesand the role of sell-side investment banks. Well worth adding to your investments bookshelf!- Charles M. Jones, Robert W. Lear Professor of Finance and EconomicsChair, Finance Sub-division, Columbia Business School, New YorkThis concise book provides a wide perspective on capital markets ranging from asset pricing, and the anatomy of buy and sellside firms, to financial statements and macro-economics. It is ideal for anyone needing a rapid introduction or re-introduction tofinance and financial institutions -- students transitioning into a graduate program in financial engineering, or technologist exploring opportunities, or even finance professional transitioning areas.- Garud N. Iyengar, Chair and Professor, Department of Industrial Engineering and OperationsResearch, Columbia University, New YorkAn excellent survey of financial markets, explaining in concise language everything from the different asset classes to fixed income and equity markets and portfolio theory. A useful and very practical orientation for finance professionals and studentsalike.- David Weisbrod, former CEO of LCH Clearnet LLC (one of the world’s largest clearinghouses)and Vice Chairman of JPMorgan , New YorkFinally, a clear and concise book that uniquely marries sound theoretical constructs with close-up practical insights. an excellent body of knowledge for both students of finance and practitioners in the asset management industry.- Adri Guha, Chief Investment Officer, Advanced Portfolio Management (institutional fund-of-funds/ advisory services)Siddhartha does an excellent job of mixing finance concepts with real life examples, thus helping build a good foundation.- Ajit Agrawal, Managing Director, Investment Research, UBS Securities LLCThis manuscript is an excellent supplement to the existing textbooks about Investments. It distinguishes itself by concise introduction of the key financial instruments and tools for analyzing them. Big-picture description of the financial system and the roleof financial intermediaries is an invaluable feature.- Mikhail Chernov, Professor of Finance, Anderson School of Management, UCLAThis book is written with the student in mind. With clear language and sharp focus on essentials, it feels like learning from apersonal tutor.- Hayong Yun, Associate Professor of Finance, Eli Broad College of Business, Michigan StateUniversity

Essential reading for anyone looking for a comprehensive introduction to investment management. This book makes quantitative finance accessible by succinctly blending various key aspects of investment management while also describing the pricing andmechanics of common financial instruments and important metrics and models most relevant in finance. Qualitative investorscan use it to incorporate quantitative tools into their investment process, and it serves as a helpful refresher for experienced quantitative investors. The annexures contain relevant background including an overview of concepts in accounting, economics andstatistics.- Tarun Gupta, Ph.D., Managing Director at AQR Capital ManagementDastidar's book provides a concise, readable and up-to-date coverage of key capital markets topics. It's perfect for introductoryfinance classes, and practitioners looking for quick refreshers.- John Kiff, Senior Financial Sector Expert, International Monetary FundCapital Markets and Investments provides a comprehensive review of today’s capital markets, financial industry structure andthe latest theories underlying asset pricing and portfolio construction. Professor Dastidar, based on his experience in both industry and academia, clearly and succinctly explains important concepts without glossing over those essential details that everyaspiring market professional must know. The book’s logical and topical format lends itself to being used as a handy desk reference.- Bruce D. Phelps, Managing Director, Head of Research, PGIM (Prudential Financial’s invest-ment management arm, with over USD 1 trillion in AUM)Masterful rendering of a complex subject into an easily digested elixir of finance; students will love the rarely-seen practical perspective that Dastidar brings to the topics.- Nandu Nayar, Hans J. Baer Chair in International Finance and Chair of the Perella Departmentof Finance, Lehigh University, PAThe textbook is like a bible for me.- Anonymous Student, Columbia University, New York

Table of Contents1.THE FINANCIAL SYSTEM – INTRODUCTION . 16What is the Financial System? Why does it exist?. 16Key Players in the Financial System . 17Specialization within the financial system . 18Principles of pricing financial instruments . 19Are Financial Markets “Efficient”? . 22Efficient Market Hypothesis . 22Counterclaims to Market Efficiency. 23References. 252.MAJOR ASSET CLASSES AND MARKETS . 26Major types of instruments . 26Bonds (Fixed Income) . 27Loans . 27Stocks (Equities) . 27Hybrid Instruments . 28Derivatives/ Synthetic Instruments . 28Major asset classes . 30Fixed Income . 30Equities . 34Commodities . 34Currencies . 34Emerging Markets . 35Connections between different markets . 353.THE ANATOMY OF THE SELLSELL SIDE . 36Structure of a Bulge Bracket Sell-side Firm . 36Investment Banking Division . 36Capital Markets . 37Prime Brokerage . 40Support Functions. 41Basic Market Microstructure . 42How do instruments trade? . 43Exchange-Traded Markets . 43Over-the-Counter (OTC) Markets . 44

Trade Date and Settlement Date. 46Further thoughts. 474.OVERVIEW OF BUY SIDE FIRMS . 49What do buy-side firms do? . 49Investment Styles . 50Investment Product Offerings . 51Mutual Funds . 52Exchange Traded Funds (ETFs) . 52Alternative Investments . 53Liquid Alts . 55Separately Managed Accounts . 55High-Frequency Algorithmic Trading Products . 55Sell-side Index Swaps . 56Capital Owners . 56Retail Investors . 56Institutional allocators . 57Intermediation – Consultants, OCIO, Fund of Funds . 59Process of picking an institutional manager . 59Working at a buy-side firm . 605.INDICES, BENCHMARKING,BENCHMARKING, RISK MODELS AND PERFORMANCEPERFORMANCE EVALUATIONEVALUATION . 62Indices – What are they? Why do we need them? . 62Criteria for a Good Index . 62Index Rebalancing . 63Examples of Popular Indices. 63Efficiency of index investing . 63Benchmark Indices vs Strategy Indices . 64Index Mechanics and Terminology . 65Measuring Risk – Risk Models. 67Risk definition . 67Risk factors – Factor-based Risk Models . 68Risk Measures . 69Role of Risk Models in Portfolio Construction. 70Performance Evaluation . 70Performance Evaluation Measures .