The Early Years

Jacob Marschak and Sir John Hicks pioneered the concept of a mean-variance approach, also known to mathematicians and physicists as the first and second moment approach, to the risk reward trade-off in the 1930s and 1940s. However, it was not until Harry Markowitz formally incorporated risk and uncertainty into financial decision-making in his description of the mean-variance approach to portfolio design in the 1950s that a more general theory of finance began to foment. Following Markowitz’s Modern Portfolio Theory, the discipline of finance had to ruminate on these ideas for a decade. Suddenly, four researchers independently arrived at the same revolutionary insight at about the same time. If we can design a portfolio based on the mean and variance of securities, perhaps we can also price individual securities based on their historic level of variability.