John V. Lintner To exit, click Go Back |
Unfortunately, one must be alive to receive a Nobel Prize. In 1990, the Nobel Prize in Economics was awarded to the major surviving developers of Modern Portfolio Theory (MPT) -- William Sharpe retired from Stanford and a founder of financialengines.com, James Tobin of Yale, and Harry Markowitz. The next section is from the Boston Globe, October 17, 1990, note the last paragraph:
History of MPT: In 1952 and 1959, Markowitz published a paper and book suggesting that a variance-covariance matrix of security returns combined with security expected returns and investor risk tolerance could give solutions finding optimal portfolios. At the time, computers could not handle this large of a problem. Now it can even be done quickly on a PC. In 1963 and 1964, Sharpe published seminal papers leading to a diagonal model that eliminated the then intractable covariance matrix. Sharpe showed that a simple diagonal portfolio model could be used for portfolio management if the correlation between various stocks all came through a common "market" security. In 1958, Tobin published a paper that introduced the Separation Theorem. If there was an optimal portfolio of risky assets (highest return given a risk level), everyone would invest some portion of their assets in that portfolio. How much was invested depends upon their risk tolerance. The remainder would be put into a riskless asset such as Treasury bills. In 1965, Lintner published two papers that are the basis of MPT -- alpha, beta and separation as we know it. In a September 1964 paper, Sharpe had an equation in a footnote that could have been solved to give the basic MPT formula. In a reply to Lintner's paper (Journal of Finance, December 1966), Sharpe courteously acknowledged missing the solution and attributed Lintner as the founder of MPT. What's the point? Academic finance has gotten so complex since the 1970's that it is virtually inapplicable. The basic principles of MPT and the Black-Scholes option pricing model (1972) are still the basis for trillions of dollars invested every day by bankers and hedge funds. Scholes and Merton shared the 1997 Economics Nobel for the option pricing theory (Black died in 1995). The prize winners in Economics that focused on investments (Markovitz, Tobin, Sharpe, Scholes and Merton) are great men, but we should not forget Lintner and Black who died before their time. Wagner was John Lintner's friend, Retirement Assistant and Teaching Fellow and misses him. He was a very smart guy. Had he not died before his time, I could have boasted that my thesis supervisor and mentor was a Noble Laureate. John Lintner was a great guy. |
|