Jack L. Treynor
Encyclopedia
Jack L. Treynor is the President of Treynor Capital Management, Palos Verdes Estates, CA. He is a Senior Editor and Advisory Board member of the Journal of Investment Management
, and is a Senior Fellow of the Institute for Quantitative Research in Finance. He served for many years as the editor of the CFA Institute
's Financial Analysts Journal.
and mentor of Fischer Black
. Trained as a mathematics major at Haverford College
, he completed Harvard Business School
with distinction in 1955 and stayed on for a year afterwards writing cases for Professor Robert Anthony. In 1956 he coauthored a paper on capital equipment leasing. At Harvard, Treynor had been taught that the way to make long-term plant decisions was to discount the 20, 30 or 40 year stream of future benefits back to the present and compare its present value with the initial investment. Importantly, the discount rate should reflect the riskiness of the benefits. Treynor noticed, however, that when the stream of benefits lasted that long, its present value was extremely sensitive to the choice of discount rate; simply by changing the rate, a desirable project could appear undesirable, and vice-versa. Treynor resolved to try to understand the relation between risk and the discount rate, and this was the impetus for his most famous "idea in the rough", the Capital Asset Pricing Model
.
Treynor began working in the Operations Research department at the consulting firm Arthur D. Little
(ADL) in 1956. In 1958 he spent his three weeks of summer vacation in a cottage in Evergreen, Colorado, and generated 44 pages of mathematical notes on the risk problem. From then on he spent his weekends working on the paper in his ADL office. Treynor’s solution to the capital budgeting problem was that the proper discount rate is the one that the capital markets themselves utilize to discount future cash flows. This is the kernel of CAPM.
By 1960 Treynor had a draft, which in its 1961 incarnation was titled "Market Value, Time, and Risk". He gave a copy to John Lintner
at Harvard University
, the only economist he knew even slightly, but Lintner failed to give Treynor any encouragement. One of Treynor’s Chicago-trained ADL colleagues, Stephen Sobotka, sent the draft to Merton Miller
. Miller and Modigliani
had co-authored their great 1958 and 1963 papers while Modigliani was teaching at Northwestern University
. Now Modigliani was moving to MIT, and he called Treynor and invited him to lunch. Modigliani said it was clear from the draft that Treynor needed to come to MIT and study economics, to "learn the lingo", and Treynor decided to take a one-year sabbatical from ADL to study at MIT. Since the first part of Treynor’s draft dealt with the one-period problem, Modigliani suggested breaking the paper into two and naming that part "Toward a Theory of the Market Value of Risky Assets". Treynor took his advice, and presented the first part to the finance faculty seminar in the fall of 1962 and the second part, titled "Implications for the Theory of Finance", in the spring of 1963. Later, months after Treynor was back working at ADL, Modigliani called to tell him about William F. Sharpe’s CAPM paper, and suggested that Treynor and Sharpe exchange drafts. "Toward a Theory of the Market Value of Risky Assets" was never published until Robert Korajczyk published a version of it in his 1999 book, Asset Pricing and Portfolio Performance. This paper is presented in the "Risk" section of Treynor's 2007 book, Treynor on Institutional Investing and is also available on the Social Science Research Network.
After Treynor’s return to ADL his manager, Martin Ernst, asked him if this work had any practical applications; Treynor suggested several applications and Ernst focused on performance measurement. The result was two Harvard Business Review
articles, the first, titled "How to Rate Management of Investment Funds", on measuring selection, appeared in 1965; the second (with Kay Mazuy), titled "Can Mutual Funds Outguess the Market?", on measuring timing, followed in 1966.
When Fischer Black arrived at ADL in 1965, he took an interest in Treynor’s work. After Donald Regan
hired Treynor in 1966 to work for him at Merrill Lynch
, Black inherited Treynor’s ADL case work. Treynor and Black coauthored three published papers, Treynor and Black (1972), Treynor and Black (1973) (both concerned with the Treynor-Black model
for portfolio construction) and Treynor and Black (1976); in the latter, Black radically rethought and rewrote Treynor’s second MIT presentation from 1963, publishing it, titled "Corporate Investment Decisions", as chapter 16 in Myers’ 1976 compilation, Modern Developments in Financial Management.
Treynor went on to apply his theories for practical purposes in the investment industry. He shared his wealth of knowledge with a younger generation by teaching at several universities. He served a dozen years as the editor of the Financial Analysts Journal, helping authors to present their ideas coherently and with clarity. Many of his papers over the years were published in the FAJ, some as articles and some as editorial commentary. Some of Treynor's writings were originally published under his own name and others under his nom de plume, "Walter Bagehot". A substantial number of these papers won awards, including the FAJ’s Graham and Dodd award and the Roger F. Murray Prize.
His ruminations cover a broad swath of the investment universe, including risk, performance measurement, micro- and macroeconomics, trading, accounting, investment value, active management, pensions, and other miscellaneous papers.
In 2007, the International Association of Financial Engineers
(IAFE) named Treynor as the 2007 IAFE/SunGard Financial Engineer of the Year (FEOY), recognizing him for his preeminent contributions to financial theory and practice, particularly the essence of the capital asset pricing model
.
Journal of Investment Management
The Journal of Investment Management is a fully refereed publication that bridges the theory and practice of investment management. The Journal Of Investment Management offers rigorous research with practical significance, drawing from the disciplines of finance, economics and accounting.JOIM's...
, and is a Senior Fellow of the Institute for Quantitative Research in Finance. He served for many years as the editor of the CFA Institute
CFA Institute
CFA Institute is headquartered in the United States of America at Charlottesville, Virginia, with offices in Hong Kong and London. Formerly known as the Association for Investment Management and Research , CFA Institute awards the Chartered Financial Analyst designation...
's Financial Analysts Journal.
Career
Treynor was the protégé of Franco ModiglianiFranco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
and mentor of Fischer Black
Fischer Black
Fischer Sheffey Black was an American economist, best known as one of the authors of the famous Black–Scholes equation.-Background:...
. Trained as a mathematics major at Haverford College
Haverford College
Haverford College is a private, coeducational liberal arts college located in Haverford, Pennsylvania, United States, a suburb of Philadelphia...
, he completed Harvard Business School
Harvard Business School
Harvard Business School is the graduate business school of Harvard University in Boston, Massachusetts, United States and is widely recognized as one of the top business schools in the world. The school offers the world's largest full-time MBA program, doctoral programs, and many executive...
with distinction in 1955 and stayed on for a year afterwards writing cases for Professor Robert Anthony. In 1956 he coauthored a paper on capital equipment leasing. At Harvard, Treynor had been taught that the way to make long-term plant decisions was to discount the 20, 30 or 40 year stream of future benefits back to the present and compare its present value with the initial investment. Importantly, the discount rate should reflect the riskiness of the benefits. Treynor noticed, however, that when the stream of benefits lasted that long, its present value was extremely sensitive to the choice of discount rate; simply by changing the rate, a desirable project could appear undesirable, and vice-versa. Treynor resolved to try to understand the relation between risk and the discount rate, and this was the impetus for his most famous "idea in the rough", the Capital Asset Pricing Model
Capital asset pricing model
In finance, the capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk...
.
Treynor began working in the Operations Research department at the consulting firm Arthur D. Little
Arthur D. Little
Arthur D. Little is an international management consulting firm originally headquartered in Boston, Massachusetts, United States, and formally incorporated by that name in 1909 by Arthur Dehon Little, an MIT chemist who had discovered acetate. Arthur D. Little pioneered the concept of contracted...
(ADL) in 1956. In 1958 he spent his three weeks of summer vacation in a cottage in Evergreen, Colorado, and generated 44 pages of mathematical notes on the risk problem. From then on he spent his weekends working on the paper in his ADL office. Treynor’s solution to the capital budgeting problem was that the proper discount rate is the one that the capital markets themselves utilize to discount future cash flows. This is the kernel of CAPM.
By 1960 Treynor had a draft, which in its 1961 incarnation was titled "Market Value, Time, and Risk". He gave a copy to John Lintner
John Lintner
John Virgil Lintner, Jr. was a professor at the Harvard Business School in the 1960s and one of the co-creators of the Capital Asset Pricing Model....
at Harvard University
Harvard University
Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...
, the only economist he knew even slightly, but Lintner failed to give Treynor any encouragement. One of Treynor’s Chicago-trained ADL colleagues, Stephen Sobotka, sent the draft to Merton Miller
Merton Miller
Merton Howard Miller was the co-author of the Modigliani-Miller theorem which proposed the irrelevance of debt-equity structure. He shared the Nobel Memorial Prize in Economic Sciences in 1990, along with Harry Markowitz and William Sharpe...
. Miller and Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
had co-authored their great 1958 and 1963 papers while Modigliani was teaching at Northwestern University
Northwestern University
Northwestern University is a private research university in Evanston and Chicago, Illinois, USA. Northwestern has eleven undergraduate, graduate, and professional schools offering 124 undergraduate degrees and 145 graduate and professional degrees....
. Now Modigliani was moving to MIT, and he called Treynor and invited him to lunch. Modigliani said it was clear from the draft that Treynor needed to come to MIT and study economics, to "learn the lingo", and Treynor decided to take a one-year sabbatical from ADL to study at MIT. Since the first part of Treynor’s draft dealt with the one-period problem, Modigliani suggested breaking the paper into two and naming that part "Toward a Theory of the Market Value of Risky Assets". Treynor took his advice, and presented the first part to the finance faculty seminar in the fall of 1962 and the second part, titled "Implications for the Theory of Finance", in the spring of 1963. Later, months after Treynor was back working at ADL, Modigliani called to tell him about William F. Sharpe’s CAPM paper, and suggested that Treynor and Sharpe exchange drafts. "Toward a Theory of the Market Value of Risky Assets" was never published until Robert Korajczyk published a version of it in his 1999 book, Asset Pricing and Portfolio Performance. This paper is presented in the "Risk" section of Treynor's 2007 book, Treynor on Institutional Investing and is also available on the Social Science Research Network.
After Treynor’s return to ADL his manager, Martin Ernst, asked him if this work had any practical applications; Treynor suggested several applications and Ernst focused on performance measurement. The result was two Harvard Business Review
Harvard Business Review
Harvard Business Review is a general management magazine published since 1922 by Harvard Business School Publishing, owned by the Harvard Business School. A monthly research-based magazine written for business practitioners, it claims a high ranking business readership among academics, executives,...
articles, the first, titled "How to Rate Management of Investment Funds", on measuring selection, appeared in 1965; the second (with Kay Mazuy), titled "Can Mutual Funds Outguess the Market?", on measuring timing, followed in 1966.
When Fischer Black arrived at ADL in 1965, he took an interest in Treynor’s work. After Donald Regan
Donald Regan
Donald Thomas Regan ,was the 66th United States Secretary of the Treasury, from 1981 to 1985, and Chief of Staff from 1985 to 1987 in the Ronald Reagan Administration, where he advocated "Reaganomics" and tax cuts to create jobs and stimulate production.-Early life:Born in Cambridge, Massachusetts,...
hired Treynor in 1966 to work for him at Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
, Black inherited Treynor’s ADL case work. Treynor and Black coauthored three published papers, Treynor and Black (1972), Treynor and Black (1973) (both concerned with the Treynor-Black model
Treynor-Black model
In Finance the Treynor–Black model is a mathematical model for security selection published by Fischer Black and Jack Treynor in 1973. The model assumes an investor who considers that most securities are priced efficiently, but who believes he has information that can be used to predict the...
for portfolio construction) and Treynor and Black (1976); in the latter, Black radically rethought and rewrote Treynor’s second MIT presentation from 1963, publishing it, titled "Corporate Investment Decisions", as chapter 16 in Myers’ 1976 compilation, Modern Developments in Financial Management.
Treynor went on to apply his theories for practical purposes in the investment industry. He shared his wealth of knowledge with a younger generation by teaching at several universities. He served a dozen years as the editor of the Financial Analysts Journal, helping authors to present their ideas coherently and with clarity. Many of his papers over the years were published in the FAJ, some as articles and some as editorial commentary. Some of Treynor's writings were originally published under his own name and others under his nom de plume, "Walter Bagehot". A substantial number of these papers won awards, including the FAJ’s Graham and Dodd award and the Roger F. Murray Prize.
His ruminations cover a broad swath of the investment universe, including risk, performance measurement, micro- and macroeconomics, trading, accounting, investment value, active management, pensions, and other miscellaneous papers.
In 2007, the International Association of Financial Engineers
International Association of Financial Engineers
The International Association of Financial Engineers is a non-profit professional society dedicated to fostering the field of financial engineering. The IAFE hosts several panel discussions throughout the year to discuss the issues that affect the industry from both academic and professional angles...
(IAFE) named Treynor as the 2007 IAFE/SunGard Financial Engineer of the Year (FEOY), recognizing him for his preeminent contributions to financial theory and practice, particularly the essence of the capital asset pricing model
Capital asset pricing model
In finance, the capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk...
.