Step 2: Nobel Laureates
and Empirical Work,”34 in which he concluded equity markets consistently incorporate all available information into their prices, and trends in capital markets cannot be identified in advance. He found that an agreement between a buyer and a seller reflects the most accurate value of a security, resulting in an environment where the only way an investor can expect to beat the market return is by taking risk greater than the market. This can be accomplished by increasing exposure to small cap and/or value stocks. Eugene Fama and Kenneth French’s 1992 paper, “The Cross-Section of Expected Stock Returns,”35 expanded upon the Nobel Prizewinning research of Harry Markowitz and William Sharpe that delivered Modern Portfolio Theory. Fama and French determined that exposure to Kenneth French market, size and value risk factors explained as much as 96% of historical returns in diversified stock portfolios. Their discoveries serve as the foundation for constructing indexes that efficiently capture risks and returns based on five independent risk factors, including term and default for fixed income.
1973 – The Birth Of Index Funds
Shortly after earning his MBA from the University of Chicago, Rex Sinquefield convinced his then employer, American National Bank of Chicago, to develop the first market-capweighted S&P 500 index fund. Established in 1973, the fund was only available to institutions,
Published on Jun 1, 2015
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...