An early model for pricing financial assets
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Harry Max Markowitz (born 1927).
In 1990, the American economist Harry Markowitz was awarded the Nobel Prize. Together with his fellow Americans Merton Miller (1923–2000) and William Forsyth Sharpe (born 1934), he was honored for developing an early model for pricing financial assets, the CAPM (capital asset pricing model), often rendered in French as MEDAF, short for "modèle d'évaluation d'actifs financiers." According to its creators, an asset's equilibrium price is determined by supply and demand for each security. The proposed formula depends on the risk specific to each asset, independently of any diversification process, the average market return, and the risk-free interest rate. The Markowitz model is widely criticized today because the assumptions underlying its use are fairly unrealistic: in particular, it assumes that there are no taxes or transaction costs and that any company can borrow unlimited amounts at the risk-free rate—which is very far from reality. Yet Markowitz's work had one undeniable virtue: it paved the way for sophisticated mathematical approaches to asset pricing.
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