MIB: Bill Sharpe on Pricing and Risk

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This week on our Masters in Business radio podcast, we sit down with William F. Sharpe, winner of the 1990 Sveriges Riksbank Prize in Economic Sciences (aka Nobel Prize for economics) who created the Capital Asset Pricing Model, and a method for calculating risk-adjusted return that has become known as the Sharpe Ratio.

Sharpe describes some of the twists and turns in his career, including his initial Ph.D thesis, which his advisor suggested dropping (he did). Casting about for an idea for a new thesis, while working at RAND, he met future Nobel laureate Harry Markowitz, who had just joined the firm. Sharpe’s advisor noted he was interested in ideas that were based on Markowitz’s work. He agreed, and Markowitz eventually became his unofficial thesis advisor.

That work alone would have made someone’s career, but Sharpe’s intellectual curiosity kept him probing. He helped Wells Fargo create the first-ever index fund. Then, he developed a way to calculate the returns as measure of investment risk — he called it the”reward to variability ratio portfolio” but the rest of us know it as The Sharpe Ratio. The ratio tells you what a portfolio returns for the amount of risk an investor assumed (versus treasuries, a riskless asset). Sharpe at 83, is currently working on an issue related to retirement income (Rismat), that he calls “the thorniest problem in all of finance.”

He is not a big fan of smart beta, saying the term “makes him sick.” Beta is the measure of how correlated an investment is to the market, regardless of whether its smart or not. He describes Smart Beta as more akin to a different name for the Fama-French Factors (value, momentum, small cap, quality, etc.) and not much more.

All of Sharpe’s books can be found after the jump.

You can stream/download the full conversation, including the podcast extras, on iTunes, SoundCloudOvercast and on Bloomberg. Our earlier podcasts can all be found on iTunesSoundcloud, Overcast and Bloomberg.

Next week, we speak with Duff McDonald, author of The Firm: The Story of McKinsey and Its Secret Influence on American Business, and  most recently, The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite.

Investors and Markets: Portfolio Choices, Asset Prices, and Investment Advice by William F. Sharpe

Portfolio Theory and Capital Markets by William F. Sharpe

Fundamentals of Investments by William F. Sharpe

William F Sharpe: Selected Works by William F. Sharpe

Portfolio Theory and Capital Markets: The Original Edition by William F. Sharpe

The Founders of Modern Finance: Their Prize-Winning Concepts and 1990 Nobel Lectures by Harry M. Markowitz, William F. Sharpe, Merton H. Miller

Investments by William F. Sharpe

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