investment consultants, and portfolio managers. We begin with a discussion of the two major approaches to EPM: the traditional approach and the quantitative approach. The remaining sections of the chapter are organized around four major steps in the investment process: (1) forecasting the unknown quantities needed to manage equity portfolios-returns, risks, and transaction costs; (2) constructing portfolios that maximize expected risk-adjusted return net of transaction costs; (3) trading stocks efficiently; and (4) evaluating results and updating the process. These four steps should be closely integrated: The return, risk, and transaction cost forecasts, the approach used to construct portfolios, the way stocks are traded, and performance evaluation should all be consistent with one another. A process that produces highly variable, fast-moving return forecasts, for example, should be matched with short-term risk forecasts, relatively high transaction costs, frequent rebalancing, aggressive trading, and short-horizon performance evaluation. In contrast, stable, slower-moving return forecasts can be combined with longer-term risk forecasts, lower expected transaction costs, less frequent rebalancing, more patient trading, and longer-term evaluation. Mixing and matching incompatible approaches to each part of the investment process can greatly reduce a manager's ability to reap the full rewards of an investment strategy. A well-structured investment process should also be supported by sound economic logic, diverse information sources, and careful empirical analysis that together produce reliable forecasts and effective implementation. And, of course, a successful investment process should be easy to explain; marketing professionals, consultants, and investors all need to understand a manager's process before they will invest in it. TRADITIONAL AND QUANTITATIVE APPROACHES TO EPM At one level, there are as many ways to manage portfolios as there are portfolio managers. After all, developing a unique and innovative investment process is one of the ways managers distinguish themselves from their peers. Nonetheless, at a more general level, there are two basic approaches used by most managers: the traditional approach and the quantitative approach. Although these two approaches are often sharply contrasted by their proponents, they actually share many traits. Both apply economic reasoning to identify a small set of key drivers of equity values; both use observable data to help measure these key drivers; both use expert judgment to develop ways to map these key drivers into the final stock-selection decision; and both evaluate their performance over time. What differs most between traditional and quantitative managers is how they perform these steps. Traditional managers conduct stock-specific analysis to develop a subjective assessment of each stock's unique attractiveness. Traditional managers talk with senior management; closely study financial statements and other corporate disclosures; conduct detailed, stock-specific competitive analysis; and usually build spreadsheet models of a company's financial statements that provide an explicit link between various forecasts of financial metrics and stock prices. The traditional approach involves detailed analysis of a company and is often well equipped to