A Hypertext Textbook

An Introduction to Investment Theory

The mathematics of risk, return, and value — from the efficient frontier to the pricing of options and bonds, told with interactive figures you can experiment with.

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Start here: Finance in Six Pictures

A short front door to the book — the six master figures whose mastery is a foundation for financial reasoning.

Contents

  1. ICapital Markets and Investment PerformanceReturns, risk measurement, the equity premium, and historical capital-markets data.
  2. IIThe Geography of the Efficient FrontierPortfolio diversification, the Markowitz model, and the Capital Market Line.
  3. IIIPreferences and Investor ChoiceUtility functions, iso-utility curves, the safety-first criterion, the Sharpe ratio, and Value at Risk.
  4. IVThe Portfolio Approach to RiskThe Capital Asset Pricing Model, two-fund separation, and the meaning of portfolio risk.
  5. VFurther Explorations of the Capital Asset Pricing ModelThe risk-return tradeoff, the security market line, beta estimation, and assessing the CAPM.
  6. VIThe Arbitrage Pricing TheoryFrom the security market line to multi-factor pricing, arbitrage in expectations, and practical factor models.
  7. VIIWhere Do Betas Come From?Beta as a risk measure, financial leverage and beta, unlevering and relevering, and capital-budgeting applications.
  8. VIIIInformation and the Efficiency of the Capital MarketsHow information becomes embedded in prices, the three forms of market efficiency, and the evidence for and against them.
  9. IXThe Option PayoffThe hockey stick — contingent claims, the kink at the strike, and why optionality is everywhere once you learn to see it.
  10. XLong-Term Corporate FinancingHow companies raise capital: stocks, bonds, warrants, and preferred shares — from issuance through trading.
  11. XIFixed Income: Pricing, Yields, and Credit RiskPricing coupon bonds; the price–yield curve and duration; and default risk, from credit spreads to the structural model of debt and equity.