After 42 years, Bill Sharpe thinks he can do better than the capital asset pricing model he helped Markowitz develop.
"His latest book, 'Investors and Markets: Portfolio Choices, Asset Prices and Investment Advice,' may send investors and academics scurrying. Published this month by Princeton University Press, the book eschews mean-variance analysis - the mathematically complex formula that relates rewards to risks of securities or portfolios - in favor of a "state preference" approach that relies on an easy-to-understand simulation. That approach is based on a model closer to that used in financial engineering than in the ivory tower. 'I think of it as "beyond mean-variance,"' Mr. Sharpe said in an interview."
Instead of focusing on risk vs reward he's looking at the fat left end of the bell curve where the bubbles, depressions, hyperinflation, and terrorist attacks reside. He tries to provide a way to estimate an investor's desire for protection and he acknowledges that investors aren't rational.
Unfortunately Markowitz doesn't agree with the new concept and the two may be having a cage match next week... I think I'm just going to watch the reviews and hold off reading the book for another six months or so.
[Edit: The linked article was first posted by FundAlarm's Ted.]
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