Most people approach the stock market with an eye
toward making good investments rather than pricing
complicated derivative securities. Mathematics
entered this branch of finance with the work of
Harry Markowitz in 1952, which laid out the groundwork
for a mathematical theory of determining the risk
and expected return associated with a portfolio of stocks.
Perhaps because the mathematics of Markowitz's
*
mean-variance analysis
*
was simple compared
to what is
encountered in derivative securities pricing, Markowitz's
ideas were adopted fairly quickly by asset managers
and became standard fare in MBA programs. Together
with Merton Miller and William Sharpe, Markowitz
won the 1990 Nobel Prize in Economics. However, from
the time Markowitz's ideas first gained acceptance until
about the time the Nobel Prize was awarded,
there was little change in the methods used
for asset management.

By contrast, in recent years we are seeing firms who manage
assets adopt much more sophisticated mathematical
methods. One reason for this is that in addition
to stocks and bonds, there are now a whole host of
derivative securities that can be used for investment,
but in order to invest wisely in these securities,
one must understand them.
Another reason seems to be that many people
who began their careers pricing and trading derivative
securities are now moving into asset management and
applying the same level of mathematical modeling.
Some of these people begin
*
hedge funds,
*
who use investors' money and mathematical models
to construct complex portfolios that isolate particular
exposures to market movements.
David Tepper, for whom the Tepper School of Business
is named, founded and directs the hedge fund
Appaloosa Management.

⇐ Back | Next ⇒ |