William F. Sharpe Biography

William Forsyth Sharpe is an American economist who received the Nobel Memorial Prize for Economic Sciences for developing the ‘Capital Asset Pricing Model’. He created a measure for the performance analysis of investments known as the ‘Sharpe Ratio’. He also developed a ‘binomial method’ for evaluating options, a method for the optimization of asset allocation and a method for evaluating the performance of investments based on returns. He started with Harry Markowitz’s ‘portfolio theory’ and developed the ‘Capital Asset Pricing Model’ or CAPM. This model could be followed by all types of investors irrespective of whether the portfolio contained a large number of risky assets or it was weighed down by riskless assets such as insured bank deposits. He suggested the value ‘beta’ as the measure of risk that cannot be mitigated in a portfolio. This meant that if the ‘beta’ value of the portfolio was 1.5, then the value of the portfolio could rise by 15 percent if the stock market rose by 10 percent. Conversely the value could go down by 15 percent if there was a reduction of 10 percent in the stock market. This became a standard of evaluating the accumulated return of all the shares in the portfolio.