Jack Treynor, whose insights into risk and return underpin theories for investment pricing and shaped the field of quantitative finance, has died. He was 86.
Treynor died May 11, in Harbor City, California, according to his wife, Betsy Treynor. No cause was given. He spent the last few years in Southern California occasionally contributing articles to financial journals, his wife said.
Though others got Nobel Prizes, Treynor is recognized as one of the discoverers of the capital asset pricing model, a cornerstone contribution to finance that codifies the role of risk in expected investment returns. He wrote extensively on topics ranging from pension and index funds to market making, spending more than a decade as editor of the Financial Analysts Journal.
“Most importantly, he was a leader in the intellectual development and incorporation of modern finance into practice,” said Robert Merton, the Nobel Prize-winning economist at Massachusetts Institute of Technology. “He led what became known as the quants. He was an early quant before we called them that.”
Treynor’s contributions go far beyond CAPM to encompass whole fields of financial theory, Merton said. Chapters in his 2007 book “Treynor on Institutional Investing” include “On the Quality of Municipal Bonds,” “How to Rate Management of Investment Funds,” “The Real Cost of Inflation,” and “Four Rules for Successful Trading.”
“It wasn’t that he just did a particular theory,” Merton said. “He was very creative and also was a leader in bringing the quantitative finance science to finance practice. That was his bridge. He never was an academic, yet he did research of academic quality.”
Jack Lawrence Treynor was born Feb. 21, 1930, in Council Bluffs, Iowa. His father, Jack Vernon Treynor, was a doctor. His mother was the former Alice Cavin. The younger Treynor showed an aptitude for math, winning a statewide science contest in high school for a paper on finite differential calculus. He also was president of the literary society and played football.
Treynor received a bachelor’s degree in math from Haverford College, in Pennsylvania, in 1951. He was drafted into the Army and served for two years in the Signal Corps, based in New Jersey. He received an MBA from Harvard Business School in Cambridge, Massachusetts, in 1955, then joined the consulting firm Arthur D. Little Inc.
Treynor was part of a wave of theorists who came to prominence in the 1950s and 1960s seeking to describe how risk interacts with investments, following the work of modern portfolio pioneer Harry M. Markowitz and Italian-born economist Franco Modigliani. Researchers at the time were interested in ways of diversifying groups of stocks to minimize shocks and how to place a value on money an investor was due in the future — rent or dividends, for example.
He was one of four men who are credited with arriving at the CAPM framework almost simultaneously, the others being William Sharpe, then at the University of Washington, John Lintner at Harvard Business School and the Norwegian economist Jan Mossin, according to MIT finance professor Andrew Lo.
Among other things, Treynor helped devise ways for companies to calculate their cost of capital, Lo said. His primary insight was that markets are good at determining the present value of future cash flows and that companies should heed them when making investment assumptions. The method he created for doing so was the first iteration of CAPM.
“In part it acknowledges that there’s a tradeoff between risk and return and CAPM quantified what the tradeoff is,” Lo said in a telephone interview. “That relationship is what gave rise to the notion of beta and so when we talk about the beta of a stock, that comes out of that framework. When we do discounted cash flow analysis, we’re using some kind of cost of capital. CAPM is the tool we use to calculate that cost of capital.”
Another implication of Treynor’s work is that trying to pick stocks and beat the market is a bad idea, Lo said.
“CAPM is also the basis of the mutual fund industry, particularly for passive investing,” he said. “You ought to just buy and hold the market and you’ll do just fine. Vanguard and all of the index funds out there came about because of the contributions of Sharpe, Treynor and others made in finding the capital asset price model. The multi-trillion dollar passive index business, we can thank Sharpe and Treynor for that wonderful gift.”
During a summer vacation in Colorado in 1958 Treynor worked on a draft his CAPM theory, producing 44 pages of notes based on a book of theoretical finance. Based on his notes, he ended up studying economics at the Massachusetts Institute of Technology in Cambridge.
Treynor presented in 1962 “Toward a Theory of the Market Value of Risky Assets,” the foundation for CAPM — nearly simultaneous to Sharpe’s paper on the same topic. He opted against publishing his findings, ceding the stage to Sharpe.
Had he published, Treynor would have shared in Sharpe’s Nobel Prize in Economics, according to Edward J. Sullivan, a professor of business administration at Lebanon Valley College in Annville, Pennsylvania. The paper was passed around in mimeographed form for years among economists but the original version wasn’t published until 1999.
Treynor worked under future Treasury Secretary Donald Regan at Merrill Lynch Pierce Fenner & Smith Inc., starting in 1966 to set up what Lo called a “computer-intensive quantitative research group.” Treynor balked at the corporate culture, Lo said, and left in 1969 to be chief editor of the Financial Analysts Journal, a position he held for 11 years.
“If I had stayed at Merrill, they would have made me into a narrow quant,” Treynor was quoted as saying in a 1992 book by Peter Bernstein.
During his years as publisher of FAJ, Treynor wrote extensively on quantitative analysis and the role of market makers, anticipating seismic shifts in the financial world by decades.
Treynor is survived by his wife and three adult children Elizabeth, Thomas and Wendy.