Why Read It?
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A classic text on investment and portfolio theory, it presents Sharpe’s groundbreaking work on the Capital Asset Pricing Model (CAPM).
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It examines how the financial markets operate and how investors can best deal with the uncertainties of pricing and risk.
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Still relevant today for investors and portfolio managers choosing investment portfolios.
Getting Started
Portfolio Theory and Capital Markets introduces the Capital Asset Pricing Model, which has had a profound impact on modern finance and investment. The CAPM details why every investment contains two distinct risks, the systematic risk due to being in the market, and the unsystematic risk of a company’s operations, and how they should be assessed in terms of individual securities and portfolios.
Author
William Sharpe (b. 1934) is Professor of Finance, Emeritus, at Stanford University’s Graduate School of Business. He has served as President of the American Finance Association, been a consultant to Merrill Lynch, and co-founded William F. Sharpe Associates. He was the winner of the 1990 Nobel Memorial Prize in Economics.
Context
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The book that introduced CAPM to the investment community, and helped make Sharpe a recognized leader in financial research.
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Discusses the impact of the CAPM on investment theory and practice, and describes its use as a model for measuring portfolio risk along with the return an investor can expect for taking that risk.
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Explains how pricing and risk inform all investments, and the uncertainties and relationship between them impact on market knowledge.
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Discusses the implications of capital market theory, and the measures that can be used to understand the data, including the now widely used Sharpe ratio.
Impact
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Provides the theoretical underpinning of and groundwork for such investment standards as modern portfolio theory, derivatives pricing and investment, and equity index funds.
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Synthesizes many related areas of portfolio theory and the capital markets into a practical treatment that takes into account market volatility and uncertainty.
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Integrates historical research and analysis to improve portfolio construction and evaluation.
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Gives a useful overview of applying the economic model to a variety of securities, and how to calculate the payoff of the portfolio.
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Explains how to turn the theories into successful investment practice, and examines the impact this has.
Quotations
“Almost all empirical research deals with ex post manifestations of investor’s expectations and their predictions of risk and correlations, and that such measures are subject to considerable error.”
“The theoretical superiority of the market portfolio led directly to the concept of the index fund.”
“[Portfolio theory] extends the classical economic model of investment under conditions of complete certainty.”
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