William F. Sharpe
STANCO 25 professor emeritus, Graduate School of Business,
Stanford University, Palo Alto, Calif.
Bill Sharpe, who shared the 1990 Nobel Memorial Prize in Economic Sciences, is one of the founders of modern portfolio theory and a seminal figure in financial economics. His pathbreaking work in creating beta, a measure of risk, and the capital asset pricing model led to a new approach to investing, geared to the use of computers and statistical analysis and quantitative methods.
Using Harry M. Markowitz's work as a basis, Mr. Sharpe's work — notably in a 1961 dissertation and "Capital Asset Pricing: A Theory of Market Equilibrium," a paper published in 1964 — presented the basis for CAPM and led to its widespread use in investment and finance.
"The concept that the market portfolio of all assets is the most efficient risk-return portfolio led to the use of betas and Sharpe ratios for performance measurement, and along with the later hypothesis that the markets are informationally efficient, led to the advent of indexing," said Bruce I Jacobs principal, Jacobs Levy Equity Management Inc., Florham Park, N.J.
Mr. Sharpe also worked closely on investment policy in financing pension obligations. In 1969, he helped Merrill Lynch Pierce Fenner & Smith Inc., New York, provide performance measurement to pension fund clients. In the 1970s, he helped Wells Fargo Investment Advisors with the creation of index funds.
He formed Sharpe-Russell Research Inc., Los Altos, Calif. in 1986 with Frank Russell Co. His focus included optimizing asset management of defined benefit plans, taking into account how pension assets correlate with liabilities, not just the risk and return of assets. About two years later, that firm was renamed Sharpe-Tint Inc., after Lawrence G. Tint, formerly managing director-quantitative methods and products at Trust Co. of the West, joined Mr. Sharpe. The firm offered an integrated asset allocation model, including strategic, tactical and dynamic approaches.
Mr. Sharpe in the late 1980s and early 1990s created returns-based style analysis, a method for analyzing the style and performance of a portfolio by using a manager's historical returns, now a widely used tool.
In 1996, he started Financial Engines Inc., a consulting firm dedicated to helping 401(k) participants and other individual investors allocate their assets more effectively.
"A lot of academics get into business, (but once they do), they don't contribute anything anymore," said Steve Hardy, president, Zephyr Associates Inc., Zephyr Cove, Nev. "But he got into business, while keeping his academic ties, and continued to contribute."