Many studies have discussed whether securities are efficiently priced. The available evidence indicates that professional money managers have not been able to exploit cost-effectively any pricing errors that do occur.

The unpredictability of changes in interest rates has a simple implication that is the basis of Dimensional's bond strategies. Specifically, current prices of discount bonds are good estimates of the prices of bonds with the same maturities one period from now.

In spite of having constructed a diversified portfolio, the disciplined investor will still notice at any given time a small number of highly volatile stocks that seem to threaten to undermine the goal of the portfolio. This, however, is an example of random error that must be tolerated but can be explained.

Many investors and financial commentators believe high earnings growth rates and high rates of return go hand in hand. But earnings growth only determines the breakdown of total returns into dividend yield and capital gain. Total expected returns are determined by risk alone.

The unusually strong performance of large cap stocks in the late 1990s is put into perspective. Patterns in the historical returns represent the normal drift of a random walk.