Investors and Markets

Portfolio Choices, Asset Prices, and Investment Advice

William F. Sharpe

• Publisher: Princeton University Press
• Year: 2011
• Print ISBN: 9780691138503, 9780691128429
• eBook ISBN: 9781400830183
• Topic: Business
• Subtopic: Finance
• Index: Business

In Investors and Markets, Nobel Prize-winning financial economist William Sharpe shows that investment professionals cannot make good portfolio choices unless they understand the determinants of asset prices. But until now asset-price analysis has largely been inaccessible to everyone except PhDs in financial economics. In this book, Sharpe changes that by setting out his state-of-the-art approach to asset pricing in a nonmathematical form that will be comprehensible to a broad range of investment professionals, including investment advisors, money managers, and financial analysts. Bridging the gap between the best financial theory and investment practice, Investors and Markets will help investment professionals make better portfolio choices by being smarter about asset prices.


Based on Sharpe's Princeton Lectures in Finance, Investors and Markets presents a method of analyzing asset prices that accounts for the real behavior of investors. Sharpe makes this technique accessible through a new, one-of-a-kind computer program (available for free on his Web site, at http://www.stanford.edu/~wfsharpe/apsim/index.html) that enables users to create virtual markets, setting the starting conditions and then allowing trading until equilibrium is reached and trading stops. Program users can then analyze the final portfolios and asset prices, see expected returns, and measure risk.


In addition to popularizing the most sophisticated form of asset-price analysis, Investors and Markets summarizes much of Sharpe's most important previous work and reflects a lifetime of thinking about investing by one of the leading minds in financial economics. Any serious investment professional will benefit from Sharpe's unique insights.

INDEX

absolute risk aversion, 51, 56

active investors, 130–31, 146, 194

adverse selection, 209

advice, personal investment, 210–12

advisors: asset allocation policies, 206–8; asset values monitored by, 201–2, 207–8; bets made by, 200, 201; division of labor with investors, 188–89, 189f; goals of, 189; need for, 188; roles of, 185, 189. See also forecasting

agreement, on predictions, 15, 18, 74

alpha values: definition of, 100–101; historic, 107, 108, 109f

American Stock Exchange: exchange–traded funds, 166; structured products, 149

APSIM (Asset Pricing and Portfolio Choice Simulator), 3–4, 24, 93

APT. See arbitrage pricing theory

arbitrage, 84

arbitrage pricing theory (APT), 195–96

Arrow, Kenneth J., 2, 4

asset allocation policies, 206–8. See also distributions

asset class factor models, 194

asset pricing: definition of, 1; formulas, 83–88; Law of One Price, 84–88, 90; optimization analyses, 86; relationship to portfolio choice, 1. See also prices

balanced funds, 207–8

bankruptcy laws, 111, 112, 121, 122

basic pricing equation (BPE), 89–90

benchmark portfolios, 194, 195

betas: kernel, 92; market, 93; of Market Risk/ Reward Theorem, 98–99; power, 99–100

betting: in financial markets, 129, 200, 208; Galton's story of, 131–32, 132f; by investors, 200–201, 208; reasons for, 129

biased predictions, 142, 146

Black, Fischer, 202

Blythe, Philip W., 169

bonds: municipal, 118–19; world, 191–92; zero coupon, 152, 153

BPE. See basic pricing equation

call options, 153, 154

capital: forms, 117–18, 119–20; human, 118, 119–20, 122–23

Capital Asset Pricing Model (CAPM): original, 2, 4, 13, 14, 96–98; portfolio choice predictions in equilibrium, 13; Sharpe ratios, 101–2

Capital Market Line (CML), 102–3, 103f

capital markets. See markets

CAPM. See Capital Asset Pricing Model

capped index return, 150

Case 1: Mario, Hue, and the Fish, 15–33; bids and offers, 43–44; consumption, 25–26, 25f; equilibrium, 24–33; equilibrium portfolios, 24–26, 24f; expected returns, 30–31, 31f; gains through trade, 26–27; margin...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• One: Introduction
• Two: Equilibrium
• Three: Preferences
• Four: Prices
• Five: Positions
• Six: Predictions
• Seven: Protection
• Eight: Advice
• References
• Index