Given the assumptions of the previous section, it is easy to see that all investors will de- sire to hold identical risky portfolios. If all investors use identical Markowitz analysis (As- sumption 5) applied to the same universe of securities (Assumption 3) for the same time horizon (Assumption 2) and use the same input list (Assumption 6), they all must arrive at the same determination of the optimal risky portfolio, the portfolio on the efficient frontier identified by the tangency line from T-bills to that frontier, as in Figure 9.4. This implies that if the weight of GM stock, for example, in each common risky portfolio is 1%, then GM also will comprise 1% of the market portfolio. The same principle applies to the pro-

4 As we pointed out in Chapter 8, the scale factor .01 arises because we measure returns as percentages rather than decimals.

5 As noted previously, we use the term "stock" for convenience; the market portfolio properly includes all assets in the economy.

III. Equilibrium In Capital Markets

9. The Capital Asset Pricing Model

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266 PART III Equilibrium in Capital Markets

Figure 9.4 The efficient frontier and the capital market line.

E(r)   CML   E(rM)     rf M  portion of any stock in each investors risky portfolio. As a result, the optimal risky portfolio of all investors is simply a share of the market portfolio in Figure 9.4.

Now suppose that the optimal portfolio of our investors does not include the