In addition to fostering research in finance, the AIMR and ICFA administer an education and certification program to candidates seeking the title of Chartered Financial Analyst (CFA). The CFA curriculum represents the consensus of a committee of distinguished scholars and practitioners re- garding the core of knowledge required by the investment professional.

There are many features of this text that make it consistent with and relevant to the CFA curriculum. The end-of-chapter problem sets contain questions from past CFA exams, and, for students who will be taking the exam, Appendix B is a useful tool that lists each CFA question in the text and the exam from which it has been taken. Chapter 3 includes excerpts from the "Code of Ethics and Standards of Professional Conduct" of the ICFA. Chapter 26, which discusses investors and the investment process, is modeled after the ICFA outline.

In the Fifth Edition, we have introduced a systematic collection of Excel spreadsheets that give students tools to explore concepts more deeply than was previously possible. These vi Front Matter Preface The McGraw−Hill Companies, 2001

PREFACE vii spreadsheets are available through the World Wide Web, and provide a taste of the sophisti- cated analytic tools available to professional investors.

UNDERLYING PHILOSOPHY

Of necessity, our text has evolved along with the financial markets. In the Fifth Edition, we address many of the changes in the investment environment.

At the same time, many basic principles remain important. 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 under- standing 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 attri- butes. 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 effi- ciency is, and always will be, a matter of debate, we hope our