Dr. William Sharpe at work in his 91探花office, about 1964 - he says that his 鈥渢ime at the 91探花was fabulous.鈥� (Foster School of Business, UW)
William Sharpe鈥檚 work is the bedrock of modern finance
William Sharpe was an assistant professor of finance in the 91探花College of Business Administration when he published his innovative 1964 article 鈥淐apital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.鈥� The Capital Asset Pricing Model (CAPM) expressed the mathematical relationship between risk and return in capital markets, and suggested a strategy for portfolio diversification.
Sharpe鈥檚 1964 鈥淐apital Asset Prices鈥� presented this graph to establish that in an equilibrium model, all assets will lie on a line relating beta to expected return. (鈥淐apital Asset Pricing: A Theory of Market Equilibrium under Conditions of Risk.鈥� Journal of Finance Vol. 19 No. 3 September 1964)
Professor Sharpe in his 91探花office in about 1964, the year his CAPM paper was published. (Foster School of Business, UW)
As a graduate student, Sharpe had been disappointed to discover that financial practice was governed by rule of thumb rather than by theory. Investors confidently believed that paying high fees to investment advisors guaranteed success in the market. So Sharpe decided to apply recently developed computer programs and to innovate new mathematical models to analyze and quantify market processes.
The result was an elegantly simple insight: exposure to greater risk earns greater returns, exposure to lesser risk earns lesser returns. Sharpe鈥檚 equation became basic to modern finance, proving that holding a portfolio of equities balanced across market risk is the wisest investment strategy. Sharpe鈥檚 paper was rejected twice before publication, but its groundbreaking ideas have informed generations of scholarship. CAPM supplied the economic argument for modern low-cost, low-risk, broadly diversified index funds-and it made Sharpe a winner of the 1990 Nobel Prize in Economics.
Master of Finance 鈥� Aug 25, 2013
Further Reading
The magazine of UW’s Foster School of Business published this 2014 bio.
Foster Business Spring 2014
Dr. William Share鈥檚 seminal article on investment risk management
Journal of Finance Vol. 19 No. 3 September 1964
The national press reported on the Nobel Prize in Economic Science, which William Sharpe shared, 10/17/1990.
New York Times
William Sharpe responded to the core questions of the Innovation initiative, 2016.
William Sharpe
