finance

book_report_3_0
this is a book report on "Capital Ideas: The Improbable Origins of Modern Wall Street by Peter Bernstein" and it is spouse to be 3-4 pages summary of book and 1-2 pages writers powint of view or what does the writer think of book and total of 5 pages. what i need in rewriting is the santance should be very simple and do not use in big words unless you have to use it but please make sure the santance are very very simple. also use alot of quotes from the book plese make sure the quotes are directly from the book. please let me know if you need the book i can upload. thank you

Running head: BOOK REPORT 1

BOOK REPORT 5

Book Report

The book capital ideas: the improbable origins of modern wall street written by peter Bernstein was published in 1992 and explains the revolution which has been going on over the past years in investment and finance and how this has significantly changed the managed of money. His concepts explain that, this kind of revolution was not as a result of money managers but as a result of a group of scholars who were mathematicians and statisticians from various fields like physics, engineering and many more.

The book traces the pioneer work of scholars and the new theories they developed in valuation, returns in investment, risk and the implementation of these theories in the present, modern world of investment. Among the scholars brought to life by Bernstein are Fischer Black, Louis Bachelier, William Sharpe, Robert Merton, Harry Markowitz, Myron Scholes, Merton Miller, and Franco Modigliani. A capital idea reveals the unique contributions of these scholars and how they have profoundly changed practices concerning managing investments in the world today.

The works of these scholars are usually found in academic journals which prove to be difficult to people with a background of mathematical limitations that is people who have a difficult in understanding mathematics. It’s for this reason Bernstein collected some works of these scholars and compiled together with his own principles to write the story of financial revolution. The book explains the concept in an easy way so that the terms can be understood by any user.

This book will be of interest to any business economist dealing with finance and investment and those others with interest of developing in this area. Bernstein makes a trace of the origin of the post world war 2 analysis of port folio and risk management models, for example the standard deviation (mean variance) model, black Scholes pricing model, and the capital asset pricing model.

The work of the French mathematician, Louis Bachelier analyzes all types of markets there is not just financial markets, the assumptions are that price movements are independent of each other and they are usually small and homogenous. This explains that movement of price or the change in a period of time can be viewed like small particles of gas interacting with other numerous gas particles of the same size in a series of collisions.

Another assumption is that, the central limit theorem and the law of large numbers holds to make distribution be of normal probability. Bernstein clearly declares that, in socialist economies the absence of active and free markets for ownership of corporate enterprises deprives the citizens of these economies the goods they want, the quality they are able to demand and at the prices which the goods are affordable to them. Without good and functioning financial markets, there is unequal distribution of resources, where these resources are misallocated especially on living standards seen to be catastrophic, economic growth and employment.

The importance of taking a risk does not escape the authors view, he observes that stocks markets make diversification easy and less expensive therefore enhancing the risk taking abilities of the society. Bernstein also describes how the needs of the real world are met by the use of theoretical innovations. Taking for example futures and options markets usually allow dealers to hedge any risk they might incur. The junk bond market will satisfy the needs of both the small companies and the investors who traded in the junk bonds, seeking the needed capital growth and creating jobs that otherwise could not be provided by their banks.

Some of the scholars that Bernstein uses are Keynesian macro-economists, but much of their work is accomplished on the micro-level, for example the verification of how efficient the security markets are, and exploring the implications. The idea of this revolution as written by Bernstein is to challenge wall street and its money managers, the essence of it all is to show that prices of stock move randomly, stock markets are efficient, and the fact that portfolio of stocks have difference in characteristics with the stocks in portfolio as result of the way the stocks relate to each other.

Majority of individual investors ran their portfolios in the normal way it was done during that time but when this revolution came it made certain changes in the management of those portfolios. Due to the broad understanding of diversity and risk, use of options and futures, growth of indexed funds and international diversification are all impacted by the revolution. The book explains the heroes on the pantheon of the theories of the modern portfolios, Louis Bachelier in 1900 gave the explanation on why stocks behave in the way they do, and Harry Markowitz introduced the concept of reward and risk and also the efficient diversifying of portfolios. James Tobin explained the separation theory, stating that the risky part of a portfolio is the same for the whole number of investors.

The contribution by Paul Samuelson is that market prices are the best in measuring intrinsic value and Barr Rosenberg helped the managers of large portfolios put these concepts in action. At a glance, the book explains how people mistakenly define risk as the chance of making loss and uncertainty as something which is not understood, resulting to believe that the future events will be determined by the past. It also brings to life ideas of uncertainty and probability, tells the difference between skill and luck, and rational decision making against irrational. In conclusion Bernstein has written this book as a history of finance and econometrics, also this book is about the heroes and their heroic ideas.

This book has a few errors too, for example Mandelbrot’s idea on prices of stock is stated as the origin of chaos theory, random fractals also by Mandelbrot is wrongly portrayed as an articulate proponent of the chaos theory. Another done by the author is to try finding proof for everything. There is no portfolio which can be insured against deviations which are to the extreme, this failure of finance theory has not produced crisis for Bernstein whose book is a compilation of history and not villains.

The last chapter of this book can be ignored by a reader without a slight loss because it states his ideologies that equilibrium will prevail even without restoration of forces. My reaction to this book is that it is a nice introductory to a very difficult topic and it is a good read before one starts to look at the more profound literature materials of financing books by scholars.

The book is easy to read and highly recommended because all theories about finance are there and there is no fear that one will loose material. The research and the used techniques are highly mathematical but the computing complexity is done without a calculator which makes the computation obsolete when the calculation is done by hand. The individual stories of the different scholars, including their biographies and their associations with each other, add a lot of significance to the story.

One of the limitations of the ideas and that Bernstein promises to rectify is lack of material on the change of managing the fixed income portfolios. Management of bond portfolio has gone through a revolution similar to that of stocks, especially in developing collateral and derivative securities. The book covers the period up to 1992 and there is no mention of the quantitative trading technology in use today, for example the book has not mentioned Brownian motion.

At the same time I find the book rich in anecdotes and personal details involving the academic founders of the modern day finance, most whom gave their information through interviews by the author. The capital ideas and their impacts they have had are too great to be ignored, therefore credit should be given to Bernstein for explaining this issues to the public. Reading this book, I have learnt about risk taking, making investments and answer any question in finance.