The years since Bodie, Kane and Marcus wrote the fi rst edition of Investments nearly two decades ago has been a period of rapid and profound change in the investments industry. 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.

This Australian edition of Investments is intended primarily as a textbook for courses at Australian universities in investment analysis. Our guiding principle has been to present the material in a framework that is organised by a central core of consistent fundamental principles and current practice in the Australian financial markets. 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 will give you the skills to conduct a sophisticated assessment of current issues and debates covered by both the popular media as well as more-specialised 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 value, but we are active researchers in the field 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 core elements 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 have explicitly highlighted the relevance of the material covered to the financial services industry. Examples include the connections made in the text to the Chartered Financial Analyst (CFA) curriculum. The CFA curriculum represents the consensus of a committee of distinguished scholars and practitioners regarding 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.

As another example of our concern that the text should include material of practical value, we have included a systematic collection of Excel spreadsheets that give tools to explore concepts more deeply. These spreadsheets are available on the website for this text (www.mhhe.com/au/bodie). They provide a taste of the sophisticated analytical tools available to professional investors.

Underlying Philosophy

Of necessity, our text has evolved along with the financial markets. In this the fi rst Australian edition of Investments, 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 diffi cult material and that fundamental principles should organise 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 off er 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, we hope our discussions throughout the book convey a good dose of healthy criticism concerning much conventional wisdom.

Mohamed Ariff
Raymond da Silva Rosa