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.
Mr. Treynor died Wednesday in Harbor City, Calif., 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, Mr. 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. From 1969 to 1981 he was editor of the Financial Analysts Journal, owned by the CFA Institute.
“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.”
Mr. Treynor's contributions go far beyond CAPM to encompass whole fields of financial theory, Mr. Merton said.
“It wasn't that he just did a particular theory,” Mr. 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 had incredible insights about the markets and models and helped bring quantitative finance into practical application,” said Bruce I. Jacobs, principal, Jacobs Levy Equity Management Inc., who knew Mr. Treynor and saw him in April in Washington at the 50th anniversary celebration of the founding of the Q Group, the Institute for Quantitative Research in Finance, an association of investment finance academics and practitioners.
“Everyone in quantitative finance today owes a debt to Jack Treynor,” Mr. Jacobs said.
“At the Financial Analysts Journal, he had to fight some vicious headwinds to bring quantitative finance to the attention of investment practitioners by publishing quantitative (investment) articles in the FAJ as editor of the journal,” Mr. Jacobs said. “Many in the profession at the time were averse to equation-heavy and statistically based articles, which was anathema to traditional money management and seemed to threaten their livelihoods.”
Barbara S. Petitt, managing editor of Financial Analysts Journal, said in an e-mail, “The world of finance has lost one of its luminaries, who contributed so much to bridging the gap between theory and practice!”
Ms. Petitt said the FAJ has “put together a collection of all his work published in the FAJ, and made every article freely available online” on its website.
Mr. 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 Norwegian economist Jan Mossin, according to MIT finance professor Andrew Lo.
Among other things, Mr. Treynor helped devise ways for companies to calculate their cost of capital, Mr. 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 trade-off between risk and return and CAPM quantified what the trade-off is,” Mr. 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.”
Mr. Treynor presented in 1962 “Toward a Theory of Market Value of Risky Assets,” the foundation for CAPM — nearly simultaneous to Mr. Sharpe's paper on the same topic. He opted against publishing his findings, ceding the stage to Mr. Sharpe.
Had he published, Mr. Treynor would have shared in Mr. 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.
During his years as publisher of FAJ, Mr. Treynor wrote extensively on quantitative analysis and the role of market makers, anticipating seismic shifts in the financial world by decades.
Mr. Treynor insights helped influence pension plan financing.
“In the mid-1970s, when many pension plans were underfunded, some prescient pension experts — Jack Treynor, Patrick Regan and William Priest — first preached the gospel of asset-liability matching, only to be ignored,” according to a Pensions & Investments story on Oct. 27, 2003.
The”concept of the integration of pension assets and liabilities into the corporate balance sheet was the central point of a book I co-authored (with Mr. Treynor and Mr. Regan) 30 years ago titled 'The Financial Reality of Pension Funding Under ERISA,' William W. Priest wrote in a letter to the editor in the Feb. 5, 2007, P&I issue.
“The authors pointed out the folly of Congress in creating the Pension Benefit Guaranty Corp., an insurance company that is mandated to take on an uninsurable risk, namely, the U.S. economy,” said Ronald J. Surz, president and CEO of PPCA Inc., in a letter to the editor in the Nov. 14, 2005, P&I issue.
Among non-professional pursuits, Mr. Jacobs said, “He was a skilled a piano player and especially loved playing jazz.”
Mr. 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, Mass., in 1955, then joined the operations research staff at the consulting firm Arthur D. Little Inc., working at the firm from 1956 to 1966, according to the ADV. From 1966 to 1969, he was manager, computer application department at Merrill Lynch, the ADV said.
Mr. Treynor is survived by his wife and three adult children, Elizabeth, Thomas and Wendy.