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Pro Money Talk » 2006 » June

Archive for June, 2006

Nobel Prize winner William F. Sharpe discusses the foundations of successful investing - Part 1

Wednesday, June 28th, 2006
 
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Recently, we had the rare opportunity to speak with one of the giants of investment and portfolio theory, William F. Sharpe (See Professor Sharpe’s bio, below). Our goal in doing the interview was to explore how the world’s most knowledgeable investors approach securities markets, and to do so in the simplest language possible. Thanks to Professor Sharpe’s patient and thoughtful explanations, we think we’ve succeeded in capturing valuable, accessible insights into the most reliable, rational investment approaches being used in practice today. Whether you’re an amateur investor or a seasoned professional, there’s something here for you.

We’ve split the interview into two parts, each about 35 minutes long. Part Two will be available in the next edition of Pro Money Talk, in 2 weeks.

During Part One of the interview, we touch on the history of portfolio theory development, dating back some 40 years to Harry Markowitz. We talk about the relationship of risk and return, and how we can best use historical information in building portfolios. We spend some time discussing “efficient markets” and the wisdom of crowds, and how investors can use the accumulated wisdom of academic and practical research to tailor portfolios to their own individual situations. We end Part One of the interview discussing Bill’s newest book, Investors and Markets — Portfolio Choices, Asset Prices and Investment Advice [Princeton University Press, 2006].

Resources and Links:

Bill Sharpe’s Website:

www.stanford.edu/~wfsharpe

A wealth of information can be found on Bill’s website, including the full draft text of his

forthcoming book, key articles and publications available for online viewing, free software

for financial analysis and simulations, and recent papers about retirement economics.

Highly recommended.

People, Resources and Concepts Mentioned in Part One of the Interview

Markowitz — Mean/Variance Approach

http://www.effisols.com/basics/MVO.htm

Arrow/Debreu — State/Preference Approach

http://cepa.newschool.edu/het/essays/uncert/statepref.htm

Financial Engines

www.financialengines.com

Vox Populi, by Galton, published in the journal Nature (PDF)

www.galton.org/essays/1900-1911/galton-1907-vox-populi.pdf

Investors and Markets — Portfolio Choices, Asset Prices and Investment Advice

www.stanford.edu/~wfsharpe/art/princeton/prince0.htm

APSIM: Asset Pricing and Portfolio Choice Simulator Free software created by Sharpe for download (requires Excel)

www.stanford.edu/~wfsharpe/apsim/index.html

Biography

William F. Sharpe is the STANCO 25 Professor of Finance, Emeritus at Stanford University’s

Graduate School of Business. He joined the Stanford faculty in 1970, having previously

taught at the University of Washington and the University of California at Irvine. In 1996,

he co-founded Financial Engines, a firm that provides online investment advice and

management for individuals, and currently serves on its board.

He was one of the originators of the Capital Asset Pricing Model, developed the Sharpe Ratio

for investment performance analysis, the binomial method for the valuation of options, the

gradient method for asset allocation optimization, and returns-based style analysis for

evaluating the style and performance of investment funds.

Dr. Sharpe has published articles in a number of professional journals, including Management

Science, The Journal of Business, The Journal of Finance, The Journal of Financial Economics,

The Journal of Financial and Quantitative Analysis, The Journal of Portfolio Management,

and The Financial Analysts’ Journal.

He has also written six books, including Portfolio Theory and Capital Markets

(McGraw-Hill, 1970 and 2000), Asset Allocation Tools (Scientific Press, 1987), Fundamentals

of Investments (with Gordon J. Alexander and Jeffrey Bailey, Prentice-Hall, 2000) and Investments

(with Gordon J. Alexander and Jeffrey Bailey, Prentice-Hall, 1999).

Dr. Sharpe is past President of the American Finance Association. In 1990 he received the

Nobel Prize in Economic Sciences.

He received his Ph.D., M.A. and B.A. in Economics from the University of California at Los Angeles.

He is also the recipient of a Doctor of Humane Letters, Honoris Causa from DePaul University,

a Doctor Honoris Causa from the University of Alicante (Spain), a Doctor Honoris Causa from the

University of Vienna (Austria) and the UCLA Medal, UCLA’s highest honor.

A detailed vitae sheet is available at www.wsharpe.com/bio/vitae.htm. Additional information can be found on the world-wide web at www.wsharpe.com and www.financialengines.com.