Question

According to the CAPM, all investors should hold the same two assets in equilibrium, but individual allocations between these two assets may still differ.

Is this statement true, false, or uncertain?

Explain

Answer 1

True

The CAPM, is line that connects risk-free rate of return with tangency point on efficient frontier of optimal portfolios offering highest expected return for a given level of risk, or lowest risk for given level of return. Portfolios with best trade-off between returns & risk lie on this line. Tangency point is optimal portfolio of risky assets, which is known as market portfolio. Under assumptions of mean-variance analysis – investors seek to maximize expected return for given amount of risk, & that there is risk-free rate – all investors select portfolios which lie on CML. Individual investors will hold just risk-free asset / some combination of risk-free asset & market portfolio, depending on investor's risk-aversion.

Hence, the market portfolio is optimal risky portfolio which is the same for every investor. Market portfolio and risk free rate are the same two assets are hold by every investor only the allocation will be different depending upon risk aversion.