Harry Markowitz, Merton Miller, and William Sharpe
Citation: For their pioneering work in the theory of financial economics.
The key idea
Markowitz: portfolios are mean-variance objects, and diversification is the free lunch. Sharpe: the CAPM — expected return equals risk-free plus beta times market risk premium. Miller (with Modigliani): capital structure irrelevance in frictionless markets.
The explanation
Markowitz's 1952 paper made portfolio choice a quadratic optimisation in mean and variance. Sharpe's 1964 CAPM derived an equilibrium asset-pricing implication: only systematic risk earns a premium. Miller's MM theorems (with Modigliani) framed corporate finance as a question of which frictions break the irrelevance result. Together they created modern financial economics.
Why Africa should care
Every Kenyan portfolio manager — CIC, Britam, Old Mutual, ICEA, Sanlam — runs descendants of Markowitz optimisation. The Sharpe ratio is the universal benchmark of fund performance reported in CMA Quarterly Statistical Bulletins. CAPM betas are used in equity-cost calculations across Nairobi-listed companies. Kenya's collective-investment-scheme industry crossed KES 600 billion AUM in 2025 (CMA), of which money-market funds account for roughly 62-67% — making this the most directly-applied Nobel-honoured framework on the continent. The MM theorems frame Treasury debates about the optimal capital structure of state-owned enterprises.
How to use it
Before judging an African manager's performance by absolute returns, compute the Sharpe ratio against a comparable benchmark. Most 'high return' funds are simply high-beta during equity bull markets.
Watch out for
CAPM empirics have been weakened by the size, value, and low-vol anomalies (Fama-French 1992, prize 2013). It remains the universal benchmark but is rarely the last word on expected returns.
Canonical works
- Harry M. Markowitz (1952) "Portfolio Selection" Journal of Finance
- William F. Sharpe (1964) "Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk" Journal of Finance
- Franco Modigliani and Merton H. Miller (1958) "The Cost of Capital, Corporation Finance and the Theory of Investment" American Economic Review
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