Theory and Portfolios

A significant side-note of interest, to promote an adequate comprehension of the time-period constraints associated with Treynor's theory, was that Treynor had separated the proposed investors' projected, expected, security returns into two, cumulative-result, additive parts (Treynor, 1962, p. 5). The first part of the security return, a) regardless of how the investor invested, the capital rate of return calculated from the use of the risk-free rate of lending was added to the second part, which was b) the return expected based upon the assumed risk for any taken risks and those taken risks had no relationship to the capital invested (p. 6). All four of the CAPM primary theorists, Treynor, Sharpe, Linter, and Mossin, had overtly agreed that an investor’s functionality, or utility, was predicated upon return and risk – typically noted when assumptions were discussed relating to common equity positions in a portfolio (Lintner, 1965b, p. 589; Mossin, 1966, p. 768; Sharpe, 1964, p. 442; Treynor, 1962, p. 13). However, some researchers in the literature posited that more factors added to the analysis for accuracy purposes, such as in the cases of the three and five factor models, could inevitably improve upon the considerations of risk and return of the CAPM (Azam & Ilyas, 2011, p. 415). Researchers in the literature realized that there were three commonly used models in contemporary practice (pp. 416-417) and that the five factor model demonstrated a slight advantage over the CAPM and the three factor model concerning accuracy as a “proxy for risk” (p. 424). Treynor's market value theory was introduced with a unique means of a discussion framework that allowed a separatist, theoretical viewpoint of the mathematics and the resulting rigor of those calculations. The framework, or experimental space used for consideration of those calculations, was that Treynor was able to summarily dismiss the risks associated with price and interest rates (Treynor, 1962, p. 4). However, a modified version of the Treynor CAPM, such as the DCAPM, could outdo the traditional CAPM concerning accurate asset pricing (Abbas, Ayub, Sargana, & Saeed, 2011, p. 189). Further, a consumption version of the CAPM (CCAPM) that used the growth of real money accounted for the consideration of the value premium that appeared since “value firms are sensitive to liquidity shocks but growth firms are not” (Balvers & Dayong, 2009, p. 337). Treynor noted that the only reason that portfolio analysis was able to be conducted was that there was a proxy for the riskless asset in existence (Treynor, 1962, p. 4). Apparently, Treynor’s notion was that the risks associated with pricing and rates were insignificant in the macroeconomy of the United States compared to "typical equity risks" (p. 4). An important conclusion was that Treynor had assumed that certain risks were insignificant when compared with the magnitude of the U.S.' macroeconomy, so the space where Treynor was experimenting was characterized by only one time period (p. 17). The ideological viewpoint of a one time period experimental space was echoed by foundational and primary theorists (Lintner, 1965b, p. 588; Markowitz, 1959, p. 299; Mossin, 1966, p. 770). There was some dissension in the ranks of the theorists for there were those theorists who sympathized with Merton’s aversion to the single time period constraint (Ross, 1980, p. 1074; Black, Jensen, & Scholes, 1972, p. 14). Researchers in the literature, by varying the time constraint of the CAPM, demonstrated that value securities portfolios did not typically over time regularly exhibit a lower return than growth securities portfolios (Spyrou & Kassimatis, 2009, p. 1899).