Archive for June 12th, 2008

Why CAPM was named CAPM?

June 12, 2008

I remember asking this question to my friends. Now Sharpe answers this in his superb interview with AFA:

Q. Continuing with our CAPM trivia quiz, over the years some of my students have wondered if the C and A are redundant.  I told them it wouldn’t have made nearly as nice of a title if we called it the AP-M.  We need the C in there. (Laugh)  But what inspired you to call it “Capital Asset Pricing”, and did you mean to communicate anything other than just asset pricing?

A.        That’s an interesting question.  I don’t know  the answer.  I wasn’t thinking about acronyms.  I think I was trying to connote the fact that we are talking about assets in capital markets.  Whereas with assets, perhaps I was thinking, you would think of cars and trucks.

Q.        So traded assets?

A.        Yes   Securities, perhaps.

 

So, that is how we have the name- CAPM, one of the most profound ideas of portfolio theory.  

 

Sharpe has a super sense of humor as well (though Avinash Dixit takes the cake when it comes to humor):

 

Q.        Well, I am glad that you [settled on capital assets]… because the buzz word is, CAP-M.   With securities, it would be SAP-M, or something. A.        Yes,            or SPAM, I’m not sure what it would have been.

:-)

 

This is a superb interview form the great mind. It tells you how the main idea came into being (Markowitz got it from a broker), how difficult it was to get the main ideas in finance across to economists, etc.

 

Highly recommended reading.

Assorted Links

June 12, 2008

1. WSJ Blog points to fedspeak- James Bullard, Kohn. It also summarisesthe proceedings a Boston Fed conference celebrating 50 years of Philips curve. It points ECB not to do a series of rate hikes

2. WSJ Blog has a fantastic post- Philips vs Friedman. You keep hearing insider stories on how certain paper was written, how this work isn’t original and was copied/stolen from someone etc.

3. Nudes has fantastic posts (as usual)- overconfidence is commonplace, nudges to improve office-life.

4. Mankiw points to Harvard/Yale duoploy in presidential elections

5. Frankel reaffirms the view that low interest rates are responsible for high commodity prices

6. TTR points to IIT expansion. I think we should leave IIT/IIM aside and focus on building other colleges in India. The standards are abysmal elsewhere and won’t improve if the focus is only on IITs etc. They are the best in the country and get the best students, faculty etc. The attention has to move to other Universities, colleges etc Otherwise name all engineering institutes as IIT.


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