Skip to main content Skip to Search Box

Definition: Sharpe, William from The Penguin Dictionary of Economics

An economist at Stanford University in California, William Sharpe, was a pioneer of the capital asset pricing model, from his article ‘Capital Asset Prices: a theory of market equilibrium under conditions of risk’, Journal of Finance (1964). He jointly won the Nobel Prize for Economics in 1990 for that achievement, which built upon the foundations laid in portfolio theory by one of his fellow winners, Markowitz. envelope theorem.

Summary Article: Sharpe, William Forsyth
From The Hutchinson Unabridged Encyclopedia with Atlas and Weather Guide

US economist. Sharpe shared the Nobel Prize for Economics in 1990 with US economists Harry Markowitz and Merton Miller for extending Markowitz's earlier normative work on optimal financial decision-making under uncertainty, and for innovating the capital asset pricing (CAP) model, which is a positive theory of equilibrium in financial markets characterized by uncertainty.

The CAP model gives a specific form to the general notion of a trade-off between the mean expected return on a diversified portfolio of securities and the systematic risk or variance of that portfolio captured by what was called the beta coefficient. A riskless portfolio would consist entirely of Treasury Bills; riskless because they never default and because their value fluctuates perfectly with the overall movements of the market. A sufficiently broad-based portfolio made up of securities selected in the same proportion as their share in total market value would carry no avoidable risk; any remaining risk of the portfolio would be the consequence of fluctuations in the economy. Beta is a measure of the extent to which the returns on the portfolio in question move with the total market portfolio. A risky portfolio is one that commands a market risk premium; that is, a return over and above the riskless rate of interest on Treasury Bills. The CAP model implies the efficient market hypothesis (EMH), namely, that the price of shares on the stock market are the best available estimate of their fundamental value because of the efficient information-using mechanism inherent in a well-organized stock market. EMH, and with it the CAP model, has come to be questioned in recent years and remains a controversial issue in financial economics.

After a BA and MA, and a PhD at the University of California, Los Angeles, in 1961, Sharpe worked as an economist at the Rand Corporation, and then taught at the University of Washington and the University of California, Irvine, in the 1960s. He joined the Graduate School of Business at Stanford University in 1970, where he remained until his retirement in 1999 (but has retained the position of emeritus professor of finance).

His publications include Portfolio Theory and Capital Markets (1970), BASIC: An Introduction to Computer Programming Using the BASIC Language (1979; with N L Jacob), and Fundamental Investments (1999; with S Alexander and M Bailey).

© RM, 2018. All rights reserved.