Investments

We wrote the first edition of this textbook two decades ago. The intervening years have been a period of rapid, profound, and ongoing change in the investments indus-try. This is due in part to an abundance of newly designed securities, in part to the creation of new trading strategies that would have been impossible without concurrent advances in computer technology, and in part to rapid advances in the theory of investments that have come out of the academic community. In no other field, perhaps, is the transmission of theory to real-world practice as rapid as is now commonplace in the financial industry.These developments place new burdens on practitioners and teachers of investments far beyond what was required only a short while ago. Of necessity, our text has evolved along with financial markets.Investments, Eighth Edition, is intended primarily as a textbook for courses in investment analysis. Our guiding principle has been to present the material in a framework that is organized by a central core of consistent fundamental principles. We make every attempt to strip away unnecessary mathematical and technical detail, and we have concentrated on providing the intuition that may guide students and practitioners as they confront new ideas and challenges in their professional lives.This text will introduce you to major issues currently of concern to all investors. It can give you the skills to conduct a sophisticated assessment of current issues and debates covered by both the popular media as well as more-specialized finance journals. Whether you plan to become an investment professional, or simply a sophisticated individual investor, you will find these skills essential.Our primary goal is to present material of practical val-ue, but all three of us are active researchers in the science of financial economics and find virtually all of the material in this book to be of great intellectual interest.Fortunately, we think, there is no contradiction in the field of investments between the pursuit of truth and the pursuit of money. Quite the opposite. The capital asset pricing model, the arbitrage pricing model, the efficient markets hypothesis, the option-pricing model, and the other centerpieces of modern financial research are as much intellectually satisfying subjects of scientific inquiry as they are of immense practical importance for the sophisticated investor.In our effort to link theory to practice, we also have attempted to make our approach consistent with that of the CFA Institute. In addition to fostering research in finance, the CFA Institute administers an education and certification program to candidates seeking the designation of Chartered Financial Analyst (CFA). The CFA curriculum represents the consensus of a committee of distinguished scholars and practitioners regarding the core of knowledge required by the investment professional. This text also is used in many certification programs for the Financial Planning Association and by the Society of Actuaries.There are many features of this text that make it consistent with and relevant to the CFA curriculum. Questions from past CFA exams appear at the end of nearly every chapter, and, for students who will be taking the exam, those same questions and the exam from which they've been taken, are listed at the end of the book. Chapter 3 includes excerpts from the "Code of Ethics and Standards of Professional Conduct" of the CFA Institute. Chapter 28, which discusses investors and the investment process, presents the CFA Institute's framework for systematically relating investor objectives and constraints to ultimate investment policy. In the Eighth Edition, we have further extended our systematic collection of Excel spreadsheets that give tools to explore concepts more deeply than was previously pos-sible. These spreadsheets are available on the Web site for this text (www.mhhe.com/bkm), and provide a taste of the sophisticated analytic tools available to professional investors.UNDERLYING PHILOSOPHYIn the Eighth Edition, we address many of the changes in the investment environment.At the same time, many basic principles remain impor-tant. We believe that attention to these few important principles can simplify the study of otherwise difficult material and that fundamental principles should organize and motivate all study. These principles are crucial to understanding the securities already traded in financial markets and in understanding new securities that will be introduced in the future. For this reason, we have made this book thematic, meaning we never offer rules of thumb without reference to the central tenets of the modern approach to finance.The common theme unifying this book is that security markets are nearly efficient, meaning most securities are usually priced appropriately given their risk and return attributes. There are few free lunches found in markets as competitive as the financial market. This simple observation is, nevertheless, remarkably powerful in its implications for the design of investment strategies; as a result, our discussions of strategy are always guided by the implications of the efficient markets hypothesis. While the degree of market efficiency is, and always will be, a matter of debate (and in fact, in this edition, we devote a full chapter to the behavioral challenge to the efficient market hypothesis), we hope our discussions throughout the book convey a good dose of healthy criticism concerning much conventional wisdom.