The Significance of the Market Portfolio

Stefano G. Athanasoulis and Robert J. Shiller

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The "market portfolio," the portfolio of all endowments in the world, has great significance in the capital asset pricing model (CAPM) in finance. The Sharpe-Lintner CAPM characterization of optimal risk sharing implies that in equilibrium no one will be subject to a random shock that is not shared by everyone else. ^ Thus, the CAPM gives us the "mutual fund theorem," which asserts that only one risky portfolio need be available to individual investors, the mutual fund that holds the market portfolio. In this paper we seek further clarification of the significance of the market portfolio beyond the bounds of the restrictive assumptions of the CAPM.

Date: 1997-01-01
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