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  • Print publication year: 2011
  • Online publication date: June 2012



Modern finance is relatively new. Before the breakthrough “Portfolio Selection” article was published by Markowitz in 1952, research in finance was basically nonquantitative and the use of quantitative models in teaching and in research was rare. A glance at finance textbooks that were used in teaching before 1952 and textbooks that are currently used suffices to reveal the revolution induced in the finance profession by the publication of this 1952 Mean-Variance (M-V) article. The next revolutionary papers in portfolio selection and equilibrium pricing were published by Sharpe, Lintner, and Black in 1964, 1965, and 1972, respectively. These three papers use Markowitz's M-V model as a springboard in developing equilibrium prices of risky assets in the capital market and in identifying beta rather than sigma as the risk measure of an individual asset in a portfolio context. The model developed by Sharpe and Lintner, known as the Capital Asset Pricing Model (CAPM), is used in virtually all research studies that deal with risk and return and occupies a substantial portion of textbooks on investments and corporate finance.

The other pillars of modern finance are the papers published by Modigliani and Miller in 1958, which focus on the optimal capital structure, and the two breakthrough papers published by Black and Scholes and by Merton on option pricing in 1973. No wonder Markowitz, Sharpe, Scholes, Merton, Modigliani, and Miller have all been awarded the Nobel Prize in Economics for their revolutionary contributions (the other researchers mentioned were not alive in relevant years when the prizes were awarded). Because this book focuses on portfolio selection and the CAPM, we mainly discuss and analyze the contributions of Markowitz, Sharpe, Lintner, and Black to the financial literature.