Abstract
Jacob Marschak and Sir John Hicks pioneered the concept of a mean-variance approach, also known to mathematicians and physicists as the first and second moment approach, to the risk reward trade-off in the 1930s and 1940s. However, it was not until Harry Markowitz formally incorporated risk and uncertainty into financial decision-making in his description of the mean-variance approach to portfolio design in the 1950s that a more general theory of finance began to foment. Following Markowitz’s Modern Portfolio Theory, the discipline of finance had to ruminate on these ideas for a decade. Suddenly, four researchers independently arrived at the same revolutionary insight at about the same time. If we can design a portfolio based on the mean and variance of securities, perhaps we can also price individual securities based on their historic level of variability.
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Notes
Harry Markowitz, “Portfolio Selection,” Journal of Finance, 7(1) (1952), 77–91.
William Sharpe, “How to Rate Management of Investment Funds,” Harvard Business Review, 43 (1965), 63–75.
William Sharpe and Kay Mazuy, “Can Mutual Funds Outguess the Market?” Harvard Business Review, 44 (1966), 131–6.
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© 2012 Colin Read
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Read, C. (2012). The Early Years. In: The Rise of the Quants. Great Minds in Finance. Palgrave Macmillan, London. https://doi.org/10.1057/9781137026149_8
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DOI: https://doi.org/10.1057/9781137026149_8
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