Jack Treynor, pioneer of modern investment theory, dies at 86

Jack Treynor, whose insights into risk and return underpin theories for investment pricing and shaped the field of quantitative finance, died Tuesday at age was 86.

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 intellec- tual 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.

“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. He 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 and received an MBA from Harvard Business School in 1955.

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.

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 MIT.

In 1962, Treynor presented “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, Pa. The paper was passed around in mimeographed form for years among economists. but the original version wasn’t published until 1999.