approach is likely to minimize regret. If an investor starts with an approach that assumes the markets are close to equilibrium, then he or she has realistic expectations of earning a fair return, and won't be led to make costly mistakes or create unacceptable losses. Suppose an investor ignores the lessons of equilibrium theory. There are lots of ways the markets can be out of equilibrium. If an investor makes a particular assumption about how that is the case and gets that approach wrong, he or she could easily be out on a limb, and the consequences could be disastrous relative to expectations. The equilibrium approach may not be as exciting, but over long periods of time the overall market portfolio is likely to produce positive results. Investors today have a lot more opportunity to invest intelligently than did previous generations. Tremendous progress has been made in both the theory and the practice of investment management. Our understanding of the science of market equilibrium and of portfolio theory has developed greatly over the past 50 years. We now have a much better understanding of the forces that drive markets toward equilibrium conditions, and of the unexpected factors that shock markets and create opportunities. In addition, the range of investment products, the number of service providers, and the ease of obtaining information and making investments have all increased dramatically, particularly in the past decade. At the same time, the costs of making investments have decreased dramatically in recent years. Today it is far easier than ever before for the investor to create a portfolio that will deliver consistent, high-quality returns. This book provides a guide to how that can be done. We have divided the text into six parts. The first presents a simple, practical introduction to the theory of investments that has been developed in academic institutions over the past 50 years. Although academic in origin, this theory is a very practical guide to real-world investors and we take a very applied approach to this material. We try to provide examples to help motivate the theory and to illustrate where it has implications for investor portfolios. Our hope is to make this theory as clear, as intuitive, and as useful as possible. We try to keep the mathematics to a minimum, but it is there to some extent for readers who wish to pursue it. We also provide references to the important original source readings. The second part is focused on the problems faced by the largest institutional portfolios. These funds are managed primarily on behalf of pensions, central banks, insurance companies, and foundations and endowments. The third part concerns various aspects of risk, such as defining a risk budget, estimating covari-ance matrices, managing fund risk, insuring proper valuations, and understanding performance attribution. The fourth part looks at traditional asset classes, equities and bonds. We look at the problem of manager selection, as well as managing global portfolios. The fifth part considers nontraditional investments such as currency and other overlay strategies, hedge funds, and private equity. Finally, the last part focuses on the particular problems of private investors such as tax considerations, estate planning, and so on. Paradoxically, the investment problems of private investors are typically much more complicated than those of most institutional portfolios simply because of the unfortunate necessity of private individuals to pay taxes. For example, even in the simplest equilibrium situation, buying and holding