Many changes have taken place in the financial markets since the first edition of Fundamentals of Investment Management was published in the early 1980s. However, the one constant has been a sincere commitment within this text to capture the excitement and enthusiasm that we feel for the topic of investment management.

Throughout the book, we attempt to present applied theory alongside real-world examples that illustrate the theory. Our goal is that by the time conscientious students complete an investment class using this textbook, they will be able to manage investments in the real world. We approach financial analysis the way it is done by many Wall Street firms. Geoff Hirt directed the CFA program for the Investment Analysts Society of Chicago (now the CFA Institute of Chicago) for 15 years and sat on the board of directors from 2002 to 2005. Stan Block has been practicing CFA for over 20 years. Both of us have taught and advised student-managed investment funds at our universities and we bring this wealth of learning experience to the students who study from this text.

Both of us manage diversified portfolios. We are close to the markets on a daily basis and keep breast of major developments in the economy, market structure, and globalization of the markets. Above all else, we have written a text that is user-friendly, but make no concessions to the importance of covering the latest and most important material for the student of investments.

KEY UPDATES TO THE TENTH EDITION

Organization

Perhaps the most significant change we've made in many editions is the reorganization of the book for the tenth edition. We have added material on behavioral finance, and created a much larger section devoted to portfolio management, including a new chapter titled Alternative Investments: Private Equity and Hedge Funds. The last section of the book now includes the introductory theory and portfolio management chapter, followed by duration and bond portfolio management, international investing, real assets, alternative investments, and the last chapter on measuring investment performance. Further reorganization of the chapters is as follows:

Part 1: We eliminated Chapter 4, formerly titled Investment Information. Today's students are very adept at finding information on the Internet, and many university libraries have electronic data accessible to the students from their home computers. We also have many web links throughout the text, and believed the space could be better used for more important material. In this instance, we moved the mutual fund chapter up from Chapter 18 to Chapter 4. This fits with the investing goals and objectives covered in Chapter 1, and also meshes with the stock market index material in Chapter 2. We also added more information about exchange-traded funds to this chapter.

Part 2: Chapters 5 through 8 have been our mainstay for financial analysis, starting with economics, industry analysis, company valuation, and financial statement analysis. All material in these chapters has been extensively updated with refreshed examples. Chapter 7 has been reorganized and is hopefully a little clearer for the student to understand.

Part 3: Chapters 9 and 10 have been swapped. Chapter 9 deals with anomalies, and we thought it made more sense to have that chapter follow the section on fundamental analysis that we cover in Part 2. Chapter 10, which was formerly titled Technical Analysis, is now titled Behavioral Finance and Technical Analysis. We have added introductory material on behavioral finance to the beginning of this chapter and have tried to show where technical analysis may in fact be trying to interpret some of the behavior we observe in investors.

Parts 4 and 5: Part 4 includes three chapters on bonds and Part 5 includes three chapters on derivative instruments. Both parts retain most of the organization of the last edition.

Part 6: As described earlier, Part 6 now includes all discussion of portfolio management, including a new chapter on private equity and hedge funds. All in all, we feel that moving some of the formerly earlier chapters into the portfolio section here made more sense than having them stand alone. In a portfolio context, these chapters combine to create a view of a diversified portfolio, and in the reordering of the chapters we tried to include more data on how these assets impacted risk and return on a pure stock and bond portfolio. In the end we have put together the asset classes of stocks, bonds, international securities, real estate and real assets, hedge funds, and private equity. These are the asset classes that are most often used by institutional investors to achieve a better risk return tradeoff than just a stock and bond portfolio

Chapter Changes

Common Changes to All Chapters

A great deal of new material has been added throughout the book. While the financial crisis is fresh in our minds, we had a tough balancing act to determine just how much time we wanted to spend on this topic. We included material where relevant, but not so much as to make the book seem like a history book to the students. Topics like the subprime mortgage market, credit default swaps, Federal Reserve Policy, and other related topics found their way into many chapters. In addition, tables, charts, and data have been updated throughout the text. For a more in-depth look at the changes made to this edition, see below, where we have highlighted chapter-specific changes.

Chapter-by-Chapter Changes

PART ONE

Chapter 1

• Added more risk categories such as tax risk, operating risk, financial risk, and manager risk.
• Contrasted defined benefit and defined contribution retirement plans.
• Expanded the discussion of geometric vs. arithmetic returns, including the mathematical equation for calculating the geometric mean.
• Added new return data from the Ibbotson Classic 2010 Yearbook.
• Significantly expanded coverage of the equity risk premium and its use in the CAPM.

Chapter 2

• Updated our example of an IPO with the Financial Engines offering, a company that was started by Bill Sharpe.
• Updated discussion of security markets organization to include the changes in the market structure and competition, including the BATS and ICE exchanges.
• Added new real world of investing box on dark pools.
• Expanded coverage of program trading with more on circuit breakers, the use of high frequency trading, and the "flash crash."

Chapter 3

• Added a more comprehensive view of the Dow Jones Industrial Average and discussed how this price-weighted average in calculated.

Chapter 4

• Replaced sources of information material with mutual funds and included expanded coverage of exchange-traded funds and closed-end funds.
• Moved discussion on unit investment trusts from the appendix to the body of the text.
• Added new real world of investing box that covers socially responsible investing, including mutual funds that invest with a religious set of values. Many religions are covered, including Catholic, Christian, Mennonite, Islamic, and Jewish funds.
• Added material on target retirement, or life-cycle funds.
• Expanded coverage of mutual fund fees by asset class.
• Expanded the section on measuring mutual fund performance to include the Standard & Poor's SPIVA scorecard, comparing actively managed funds to index funds.

PART TWO

Chapter 5

• Added information on the financial crisis and how it has affected monetary policy as well as the fiscal policy initiatives of TARP and TALF.
• Added a new real world of investing box from the Congressional Budget Office on the budgetary treatment of companies such as General Motors, AIG, and Citigroup, now owed by the government.
• Deleted the section on business cycles and industry relationships.

Chapter 6

• Expanded coverage of industry life cycles to include a discussion of product life cycles.
• Replaced the old box on brand names with a new, updated box discussing what a brand name worth.
• Continued to use the pharmaceutical industry as an example throughout the chapter, but updated all tables and charts and included a new section on Obamacare and its implication to this industry.
• Expanded the discussion of sector rotation with a theoretical model based on Sam Stovall's S&P Guide to Sector Rotation.
• Added an appendix from Standard & Poor's Industry Surveys regarding how to analyze a pharmaceutical company.

Chapter 7

• Expanded coverage of the Capital Asset Pricing Model to include the deficiencies of beta as well as the problems with the equity risk premium.
• Added discussion on how to use corporate bond yields to calculate an equity risk premium.
• Continued to use Johnson & Johnson as the company example for the valuation models, keeping the material from the pharmaceutical industry in Chapter 6 tied into the company valuation chapter. All J&J data was updated.
• Moved the sustainable growth model from the appendix to the body of the chapter. Also expanded this material to include a more complete discussion of the model to help students evaluate company growth when using the dividend discount models.
• Added a new section discussing growth rates across the variables of per share data. We start with sales, net income, earnings, dividends, book value, and cash flow to show how the growth of these variables are related to one another.

Chapter 8

• Continued to use Johnson & Johnson for the ratio chapter, while all charts and tables have been updated.
• Expanded coverage of the difference between forward price-earnings ratios and trailing price-earnings ratios.

PART THREE

Chapter 9

• Swapped Chapters 9 and 10 (Chapter 9 in this edition was previously Chapter 10).
• Updated the material on merger and acquisition premiums.
• Updated the example of a White Knight with J.P. Morgan, Bear Sterns, and other forced marriages motivated by the financial crisis.
• Added a new real world of investing box concerning IBM's common stock repurchase program of over $100 billion since 1995 and $73 billion since 2003.
• Updated the Value Line Performance data.

Chapter 10

• Changed the title for Chapter 10 (Behavioral Finance and Technical Analysis) to reflect added coverage of behavioral finance, as chapter now includes concepts such as market bubbles, the heuristics of representativeness, availability, anchoring-and-adjustment, prospect theory, overreaction, certainty effect, mental accounting, and framing.
• Added a new real world of investing box that highlights the Super Bowl as a predictor of the stock market.
• Added the fear index (VIX) and a graph of the CBOE SPX market volatility index to the technical analysis section.

PART FOUR

Chapter 11

• Made general updates to data and added information regarding the financial crisis.

Chapter 12

• Expanded explanation of the approximate yield to maturity and its weighted denominator.

Chapter 13

• Updated the Amazon convertible bond example.
• Updated all tables for convertible bonds selling at a discount, premium, and par, as well as the discussion that analyzes the bond information.
• Updated tables for warrants and added the terms in-the-money and out-of-the-money warrants.

PART FIVE

Chapter 14

• Made general updates to data and content.

Chapter 15

• Updated discussion of major commodity exchanges to reflect the consolidation in the industry.
• Updated data for the size and margin requirements of the various commodities.
• Added a section on credit default swaps.

Chapter 16

• Updated all tables and application examples.

PART SIX

Chapter 17

• Made general updates to data and content.

Chapter 18

• Expanded the real world of investing box to update the interest discussion.
• Moved modified duration and convexity from the appendix to the body of the text.
• Added a table on the duration of U.S. Treasury securities from the one-month bill to the 30-year bond.
• Added a new section on bond portfolio strategies with changing interest rates.
• Added the use of bond ladders as one example of managing a bond portfolio and created an example of a bond ladder for three successive periods in an environment of rising interest rates.
• Added a new section on bond swaps, including tax swaps and pure pick-up-yield swaps.

Chapter 19

• Updated tables with new data for emerging and developed markets as well as the correlations between markets.
• Added material on the 20 largest U.S. multinationals to give a better comparison of market size between small and large markets.
• Increased coverage of China and its impact on the global markets.
• Updated all the correlations of the developed markets and discussed what happens to correlations in times of global financial crisis.
• Updated the data and discussion of BRICs -Brazil, Russia, India, and China.
• Added a section on corporate governance to the list of problems with international investing.
• Expanded the coverage of exchange-traded funds as investment vehicles for international investing and included a table of correlation coefficients between ETFs covering 15 countries.

Chapter 20

• Created a large section dealing with real estate as an asset class that can diversify a portfolio by lowering risk and increasing return. This section includes many charts and tables that compare the returns and correlations of REITS to other asset classes, such as corporate and U.S. government bonds, large and small stocks, and treasury bills and inflation.
• Updated discussion of gold and silver prices.

Chapter 21

• Created a completely new chapter (titled Alternative Investments: Private Equity and Hedge Funds), which is divided into two parts: private equity and hedge funds.
• There is an overview of the core-satellite portfolio model and an explanation of how institutional investors use this concept for asset allocation strategies.
• We define hedge funds as unregulated partnerships and discuss the various types of strategies hedge funds use, such as traditional long-short, merger arbitrage, convertible bond arbitrage, short only, and more.
• In the private equity section we discuss venture capital and its various stages of seed capital, early stage, middle stage, and late stage funding. We include histories of returns by stage and the size of the markets over time.
• Contains a real world of investing box featuring Kleiner Perkins Caufield and Byers, several companies they funded that become successful (such as Google), and several companies they hold in their portfolios that are still private.

Chapter 22

• Updated charts and graphs from Ibbotson's Classic 2010 Yearbook.
• Added a section on how returns and standard deviations change as the asset allocation within a portfolio moves from 100 percent stock to 100 percent bonds.