•  Excel Problems —New to this edition! Selected chapters contain problems, denoted by an icon, specifically linked to Excel templates that are available on the book website at www.mhhe.com/bkm

•  The Investments Environment ( Ch. 1) contains new material on the relationship between stock prices and investment incentives, and correspondingly, the role of security markets in digesting information about the prospects of firms and allocating capital across firms.

•  How Securities are Traded ( Ch. 3) has been largely rewritten to reflect the ongoing transformation of trading practices, the growing dominance of electronic trading, the accelerating consolidation of securities markets, and continuing regulatory reform.

•  Learning about Risk and Return from the Historical Record (Ch. 5) has been extensively reworked with new material on time series versus scenario analysis to estimate return distributions, deviations from normality (skewness and kurtosis), investment risk for long-term versus short-term horizons, and estimation of value at risk from historical frequency distributions.

•  Risk Aversion and Capital Allocation to Risky Assets ( Ch. 6) formally chapters 6 and 7, this chapter now integrates material on risk aversion and capital allocation. It introduces new material on interpreting and estimating investor risk aversion.

•  Optimal Risky Portfolios ( Ch. 7) contains a new section exploring the controversy over risk in the long run. It demonstrates the difference between risky sharing and risk pooling, and how these concepts bear on the notion of “time diversification.” The chapter now contains two substantial appendices. In the first, we present an integrated review of portfolio statistics and show how Excel or similar spreadsheet programs can be used to estimate relevant statistics. In the second, we show how to construct efficient-frontier portfolios as well as the optimal risky portfolio using Excel.

•  Index Models ( Ch. 8) introduces index models as a means of practically implementing the Markowitz algorithm introduced in the previous chapter. It also contains two new section on using the model. The first is a module on economic estimation of the index model in Excel and interpretation of Excel's regression output, in particular for the decomposition of risk into market versus firm-specific sources. The second is a module on the construction of the optimal risky portfolio using the estimated parameters of the index model.

•  The Capital Asset Pricing Model ( Ch. 9) introduces new material on the relationship between the model of asset pricing and its role in real-world portfolio management, with emphasis on interpreting tests of the CAPM and their implication for portfolio management. Chapter 9 also provides new introductions to important extensions of the basic CAPM, specifically the implications of extra-market risk and hedge motives, and the role of liquidity in asset pricing.

•  Behavioral Finance and Technical Analysis ( Ch. 12), in this new chapter , the text discusses the behavioral critique of efficient market theory, considers the implications of behavioral research for stock market anomalies, and offers an introduction to technical analysis, which can be motivated by some of the behavioral biases discussed in the chapter.

•  Empirical Evidence on Security Returns ( Ch. 13) now includes recent evidence on the proper interpretation of growth versus value investment strategies, as well as the role of liquidity on asset pricing.

•  The Term Structure of Interest Rates ( Ch. 15), considerably rewritten, the emphasis of the chapter has been shifted away from unobservable expectations to observable market prices. Its point of departure is the term structure observed in the prices of stripped Treasury securities.

•  Managing Bond Portfolios ( Ch. 16) contains a new section on duration and convexity of mortgage-backed securities and mortgage derivatives .

•  Equity Valuation Models ( Ch. 18) now contains new valuation models, all of which are illustrated with Excel spreadsheets applied to a real firm. Free cash flow models and multi-period dividend discount models are given substantially greater coverage than in earlier editions of the text.

•  Options Markets ( Ch. 20) has new material on new derivative markets in macroeconomic indicators.

•  Option Valuation ( Ch. 21) contains new treatments of implied volatility and empirical evidence on option pricing models.

•  Futures and Swaps ( Ch. 23) presents an expanded discussion of hedging using futures contracts, introducing the notion of market-neutral positions and the applications of such positions by hedge funds. All material on swaps is now integrated into this chapter.

•  Portfolio Performance Evaluation ( Ch. 24) new updates includes a discussion on hedge funds, as well as consideration of evaluation of derivative-like performance.

•  The Process of Portfolio Management ( Ch. 26) contains new sections on practical advice for investment strategy, focusing on investor age, tax status, and hedging moves.

•  Active Portfolio Management ( Ch. 27 ) has been completely updated. Much of the material in this chapter from the previous edition has been moved to the index model chapter and the performance evaluation chapter. The new chapter includes analysis of application of the Black-Litterman model and the appropriate use of forecasts in the context of the index model and the Treynor-Black model .