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.
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