Over the past two decades, financial professionals have had available to them excellent reference books on specialty areas in finance. There are handbooks on corporate financial management, financial instruments, portfolio strategies, structured finance, capital budgeting, derivatives, and the list goes on. But to truly understand financial markets throughout the world, it is necessary to understand how financial decision makers—such as corporate treasurers, chief financial officers, portfolio managers, traders, and security analysts—make decisions and the tools that they employ in doing so. From that perspective, the idea for this handbook was conceived.

Finance is the application of economic principles and concepts to business decision making and problem solving. The field of finance can be considered to comprise three broad categories: financial markets and instruments, financial management, and investment management.

The field of financial markets and instruments deals with the role of financial markets in an economy, the structure and organization of financial markets, the efficiency of markets, the role of the various players in financial markets (i.e., governments, regulators, financial institutions, investment banks and securities firms, and institutional and retail investors), and the determinants of asset pricing and interest rates.

Financial management, sometimes referred to as business finance, is the specialized field in finance that is concerned primarily with financial decision-making within a business entity and encompasses many different types of decisions. (While financial management is sometimes referred to as corporate finance, the principles are applied to the management of municipalities and nonprofit profit entities.) We can classify financial management decisions into two groups: investment decisions and financing decisions. Investment decisions are concerned with the use of funds—the buying, holding, or selling of all types of assets. Basically, the types of assets acquired are either working capital, such as inventory and receivables, or long-term assets. Decisions involving the former are called working capital decisions and those involving the latter are called capital budgeting decisions. Financing decisions are concerned with the acquisition of funds to be used for investing and financing day-to-day operations. Basically, this involves the selection of the firm's capital structure—that is, the combination of equity and debt used to finance the firm—and is referred to as the capital structure decision. The financing decision also involves the determination of how much of the company's earnings to retain and how much to distribute to shareholders in the form of dividends. This decision is referred to as the dividend decision. Whether a financial decision involves investing or financing, the core of the decision will rest on two specific factors: expected return and risk. Expected return is the difference between potential benefits and potential costs. Risk is the degree of uncertainty associated with the expected returns.

Investment management is the area of finance that focuses on the management of portfolios of assets for institutional investors and individuals. The activities involved in investment management, also referred to as asset management, include working with clients to set investment objectives and an investment policy to accomplish those objectives, the selection a portfolio strategy consistent with the investment objectives and investment policy, and the construction of the specific assets to include in a portfolio based on the portfolio strategy. Investment management begins with the decision as to how to allocate funds across the major asset classes (e.g., stocks, bonds, real estate, alternative investments). This decision, referred to as the asset allocation decision, requires a thorough understanding of the expected returns and risks associated with investing in a specific asset class. Again, we see the importance of understanding expected return and risk. The investment strategy employed can be classified as either active or passive and the decision as to which type to follow depends on the client's view of the efficiency (i.e., the difficulty of obtaining superior returns) of the market for the asset class. The portfolio construction phase involves assembling the best portfolio given the client's investment objectives, given the investment constraints set forth in the investment policy, and the estimated expected return and risk of the individual assets that are potential candidates for inclusion in the portfolio.

These three general areas use theories and analytical tools developed in other disciplines. For example, theories about the pricing of assets and the determination of interest rates draw from theories in economics. In fact, many academics refer to finance as financial economics. There are investment management strategies that utilize theories and concepts that draw from the field of psychology, giving rise to the specialized field in finance known as behavioral finance. The complex nature of financial markets requires a finance professional to draw from the fields of statistics and econometrics in order to describe the movement in asset prices and returns, as well as to obtain meaningful measures of risk. The field of financial risk management, used both in financial management and investment management, employ these tools. These same tools are used by investment managers in formulating and testing potential strategies and in the valuation (pricing) of complex financial instruments known as derivatives. Investment managers and financial managers utilize sophisticated mathematical models developed in the area of operations research/management science to aid in making optimal allocation decisions such as in portfolio construction and the selection of capital projects. Managers also use simulation models, a tool of operations research, in a variety of activities that involve corporate and investment decisions. Financial engineering, sometimes referred to as mathematical finance, is the relatively new specialized field in finance that uses statistical and mathematical tools to deal with problems in all areas of finance and risk management.

This multivolume reference provides a bird's-eye view of finance that will help the reader appreciate the wide range of topics that the discipline of "finance" encompasses. While there are handbooks that address specialized areas within finance, the purpose of this three-volume handbook is to cover all of the areas mentioned above and is intended for professionals involved in finance, as well as the student of finance.

This three-volume handbook offers coverage of both established and cutting-edge theories and developments in finance. It contains chapters from global experts in industry and academia, and offers the following unique features: