Theory of Active Portfolio Management (Chapter 27)   We have expanded the discussion of the Treynor-Black model of active portfolio manage- ment, paying attention to how one should optimally integrate "noisy" analyst forecasts into the portfolio construction problem. Front Matter Preface The McGraw−Hill Companies, 2001           x PREFACE     In addition to these changes, we have updated and edited our treatment of topics wher- ever it was possible to improve exposition or coverage.       ORGANIZATION AND CONTENT   The text is composed of seven sections that are fairly independent and may be studied in a variety of sequences. Since there is enough material in the book for a two-semester course, clearly a one-semester course will require the instructor to decide which parts to include. Part I is introductory and contains important institutional material focusing on the fi- nancial environment. We discuss the major players in the financial markets, provide an overview of the types of securities traded in those markets, and explain how and where se- curities are traded. We also discuss in depth mutual funds and other investment companies, which have become an increasingly important means of investing for individual investors. Chapter 5 is a general discussion of risk and return, making the general point that histori- cal returns on broad asset classes are consistent with a risk-return trade-off. The material presented in Part I should make it possible for instructors to assign term projects early in the course. These projects might require the student to analyze in detail a particular group of securities. Many instructors like to involve their students in some sort of investment game and the material in these chapters will facilitate this process. Parts II and III contain the core of modern portfolio theory. We focus more closely in Chapter 6 on how to describe investors risk preferences. In Chapter 7 we progress to asset allocation and then in Chapter 8 to portfolio optimization. After our treatment of modern portfolio theory in Part II, we investigate in Part III the implications of that theory for the equilibrium structure of expected rates of return on risky assets. Chapters 9 and 10 treat the capital asset pricing model and its implementation using index models, and Chapter 11 covers the arbitrage pricing theory. We complete Part II with