The Theory of Risk, Return, and Performance Measurement

The purpose of this introductory chapter is to trace the role that Jack Treynor played in the development and application of the role of risk in stock price valuation and portfolio performance measurement. In the King’s English, the author seeks to acquaint readers with the modern theory of portfolio theory, capital market equilibrium, how institutional investors use modern risk models, and portfolio performance measures. Jack Treynor was at the forefront of these topics some 50 years ago and almost every investment text, many professional journal articles, and the investment practitioner community cite his portfolio performance ratio. One could describe this chapter as “Treynor for the Masses.” It is recommended that the reader refer to five reference volumes for this chapter: (1) Treynor on Institutional Investing; (2) William Sharpe, entitled Portfolio Theory and Capital Markets; (3) The Founders of Modern Finance: Their Prize-winning Concepts and 1990 Nobel Lectures; (4) the Christopherson, Carino, and Ferson monograph, entitled Portfolio Performance Measurement and Benchmarking; and the Connor, Goldberg, and Korajczyk monograph, entitled Portfolio Risk Analysis.