Investments, tenth edition

   Why Do All Investors Hold 

the Market Portfolio? 

 

What is the market portfolio? 

When we sum over, or aggregate, 

the portfolios of all individual 

investors, lending and borrowing 

will cancel out (because each lender has a corresponding borrower), and the value of the 

aggregate risky portfolio will equal the entire wealth of the economy. This is the    market 

portfolio,    

M.    The proportion of each stock in this portfolio equals the market value of the 

stock (price per share times number of shares outstanding) divided by the sum of the mar-

ket value of all stocks.  

4

   This implies that if the weight of GE stock, for example, in each 

common risky portfolio is 1%, then GE also will constitute 1% of the market portfolio. The 

same principle applies to the proportion of any stock in each investor’s risky portfolio. As 

a result, the optimal risky portfolio of all investors is simply a share of the market portfolio 

in   Figure 9.1 .  

E(r)

CAL(P)

Efficient Frontier