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The Significance of the Market Portfolio

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  • Athanasoulis, Stefano G.
  • Shiller, Robert J.

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.

Suggested Citation

  • Athanasoulis, Stefano G. & Shiller, Robert J., 1997. "The Significance of the Market Portfolio," ISU General Staff Papers 199701010800001038, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:199701010800001038
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