MIB: Bill Sharpe Pricing Stocks, Assessing Risk

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.

It is nearly two hours of wonky goodness.

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 as The Sharpe Ratio. It tells you what a portfolio returns relative to the amount of risk an investor assumed (versus treasuries, the riskless asset).

Sharpe at 82, 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.

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

Next week, we speak with Daren Acemoglu, the James Killian Professor of Economics at the Massachusetts Institute of Technology, and author of Why Nations Fail: The Origins of Power, Prosperity, and Poverty.



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