though competition will certainly quickly eliminate most such opportunities. In equilibrium, markets will be relatively efficient, and to the extent that there are limited opportunities left to create excess returns, why would any profit-seeking investor put such proprietary insights into print? The answer is, of course, that in truth they would not. Let's be honest: To the best of our ability we have tried not to include any proprietary information; there are no secret insights buried in this book about how to beat the market, and no descriptions of the exact factors that enter our quantitative return generating models. Clearly some of the anomalies we rely on to actively manage assets are not equilibrium phenomena, and the process of inviting too many competitors to fish in our pond would diminish our ability to create excess returns in the future. We do believe, though, that the material we have written here is worthwhile. What we have tried to do is to describe what happens when markets are in equilibrium, and how investors, trying to maximize their investment return, should behave. We also address the question of how investors might, as we do, try to identify and look to take advantage of deviations from equilibrium. Enough about equilibrium theory. The authors of this book are all market professionals and what we have written is designed to be a practical guide. Although we spend a few chapters in the beginning developing a simple, one-period version of a global equilibrium model, the main body of the text is concerned with what it takes to be a serious investor in the world today. The basics of being a smart investor involve understanding risk management, asset allocation, the principles of portfolio construction, and capital asset pricing. The latter refers to being able to identify the return premiums that are justified by the risk characteristics of different securities, and therefore understanding the basis for being able to identify opportunities. We have chapters focused on the traditional equity and fixed income asset classes as well as on alternative assets such as hedge funds and private equities. We believe that active management can be productive, and we discuss how to build a portfolio of active managers. We understand, though, that not everyone can outperform the average and that in equilibrium it has to be extremely difficult for a portfolio manager to be consistently successful at the active management game. We have a core focus on the problems faced by institutional funds, but also several chapters on the special issues faced by taxable investors. We hope the book fills a gap by tying together the academic theories developed over the past 50 years with the practicalities of investment management in the twenty-first century. Finally, we provide here a few words on who we are, and a few words of thanks to those to whom we are indebted. We are the Quantitative Resources Group, a part of Goldman Sachs Asset Management (GSAM). Our group has a number of functions. We manage money using quantitative models, we build financial and risk models, we act as fiduciaries and advisors to institutional funds, and we produce research and market outlooks. Our debts are many, though clearly our deepest is to Fischer Black, our intellectual leader, a cherished colleague, and the first head of quantitative research in GSAM. Fischer was a great believer in the practical value of the insights provided by equilibrium modeling and he inspired our pursuit of this approach. We also wish to thank our clients whose challenges and questions have sponsored all of the activ-