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atate2007

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tT
发表于 2011-7-11 18:37 | 只看该作者

CML and market portfolio

having, market, reading, efficient
Hi Guys,

I'm reading the "Asset Pricing Models" section for level 1.

I'm understanding how having a risk free asset with a portfolio M transform the efficient frontier to the CML.

What I'm not understanding, is the raisonning that says: since this is true for all investors, portfolio M must be the market portfolio

Tks for your help

 

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Finalnub

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发表于 2011-7-11 18:37 | 只看该作者
"since this is true for all investors, portfolio M must be the market portfolio "

I agree with Bruin, but remember that this statement is a consequence of all those assumptions about investors in CAPM that you surely don't believe (because they aren't true) incl. all of them have the same quadratic loss utility function which they all use to maximize their individual utilities, they are all rational, they understand and can predict all the risks/returns for all possible securities, yada, yada...

If all these things are true, you invest your risky assets in the tangency portfolio because all other portfolios are inferior. If that's the one everyone invests in, by definition it's the market portfolio. It's not really the S&P 500; it's all the investable assets in the world.

Nobody really believes CAPM but that's why it's taught in an exam called "Level 1".

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kmf229

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发表于 2011-7-11 18:37 | 只看该作者
Thanks you both , that helps !

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JoeyDVivre

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4#
发表于 2011-7-11 18:37 | 只看该作者
JoeyDVivre Wrote:
-------------------------------------------------------
> remember that this
> statement is a consequence of all those
> assumptions about investors in CAPM that you
> surely don't believe (because they aren't true)
> incl. all of them have the same quadratic loss
> utility function which they all use to maximize
> their individual utilities, they are all rational,
> they understand and can predict all the
> risks/returns for all possible securities, yada,
> yada...

Economics grad?


> If all these things are true, you invest your
> risky assets in the tangency portfolio because all
> other portfolios are inferior. If that's the one
> everyone invests in, by definition it's the market
> portfolio. It's not really the S&P 500; it's all
> the investable assets in the world.

Good answer.



Edited 1 time(s). Last edit at Friday, October 22, 2010 at 04:18PM by defone.

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