This book reminds
me a lot of the 1959 book by the author's mentor, Harry Markowitz. In that book,
Markowitz elaborated on his theory of portfolio selection. People often don't
realize that Markowitz intended that as an entirely practical book that would
introduce his ideas to the masses—or at least to the investment managers who worked
for the masses. He painstakingly walked readers through elaborate optimization
mathematics long before those readers would have access to computers that might
handle the mathematics. The effort was doomed from the start, but Markowitz's
book is celebrated nonetheless for its theoretical contribution.
Flash forward
fifty years, and we see William Sharpe attempting much the same thing. In this
book, he tries to explain the mathematics of portfolio optimization using a
discrete state-price model. The discussions are very accessible, but don't
compromise on practical rigor. Sharpe even provides necessary simulation
software for free download. Of course, his hopes are as quixotic as were
Markowitz's. This stuff is far too abstract for your run-of-the-mill investment
advisor.
Contents
Preface
1. Introduction
2. Equilibrium
3. Preferences
4. Prices
5. Positions
6. Predictions
7. Protection
9. Advice
As with
Markowitz's book, I think Sharpe's will be more recognized for its
theoretical worth. For more theoretically inclined readers such as budding
financial engineers or academics, Sharpe provides a
wonderful introduction to portfolio selection using a discrete state-price
model.
Topics that are
explained in largely non-technical language include market equilibrium, utility, complete markets,
state prices, consumption-based models, the pricing kernel, CAPM, and so much
more. It is all presented in the context of developing a simulation model that
might be used for practical investment decision making.
A problem with the book is confusion about a
suitable audience. In trying to cater to an unsophisticated audience, Sharpe
makes the book too popular, and certainly too verbose for the more
sophisticated audience he (perhaps unintentionally) will appeal to. That
audience will be disappointed that Sharpe doesn't cite references, but they will
otherwise be delighted with a narrative that is both accessible and
sophisticated. [November 22, 2006]
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