Market Value, Time, and Risk

Abstract

(Revised 4/29/15, with minor edits by Craig William French)Abstract by Craig William FrenchThis paper reprints a slightly edited version of Jack L. Treynor's 1961 CAPM manuscript, which has previously been unavailable to the public. The author's facsimile of the original was obtained thanks to the kind generosity of Mr. and Mrs. Treynor. Edits in the present version, which differ from the original, include minor typographical corrections and minor notation differences for some variables in the formulae. Pagination is as in the original. In 1958, Jack Treynor was employed by Arthur D. Little. That summer he took a three-week vacation to Evergreen, Colorado, during which he produced forty-four pages of mathematical notes on capital asset pricing and capital budgeting. Over the next two years, Treynor refined his notes into what is in all likelihood the first CAPM. Treynor gave a copy of this early model to John Lintner at Harvard in 1960. While in business school at Harvard from 1953 through 1955, Mr. Treynor had taken nearly every finance course offered, and though he signed up for Lintner’s economics course he was forced to cancel due to a schedule conflict. In 1960, John Lintner was the only economist he knew even slightly. Treynor refined his 1960 model into the 45-page “Market Value, Time, and Risk” [the present paper]. This paper, Treynor (1961), develops the CAPM using the concept of experiment space to quantify risk and risk relations. Without his knowledge or encouragement, one of Mr. Treynor’s colleagues sent the draft to Merton Miller in 1961, after Miller had moved to the University of Chicago from Carnegie Institute of Technology. Miller sent the paper to Franco Modigliani at MIT in the spring of 1962, and Modigliani invited Treynor to embark on a program of graduate work at MIT under his supervision. Treynor did so during the 1962-1963 academic year; in addition to Modigliani’s course, he took Bob Bishop’s price theory and Ed Kuh’s econometrics courses, among others. By the fall of 1962, Treynor had consolidated the first part of Treynor (1961), on the single-period model, into “Toward a Theory of Market Value of Risky Assets,” and presented it to the MIT finance faculty.A more complete description of the development of the Treynor CAPM may be found in French, Craig W., The Treynor Capital Asset Pricing Model. Journal of Investment Management, Vol. 1, No. 2, pp. 60-72, 2003. Available at SSRN: http://ssrn.com/abstract=447580.A reprint of Treynor's 1962 paper, “Toward a Theory of Market Value of Risky Assets,” may be found in French, Craig W., Jack Treynor's 'Toward a Theory of Market Value of Risky Assets' (December 28, 2002). Available at SSRN: http://ssrn.com/abstract=628187.