attribute this in part to the use of different input lists in the formation of the optimal risky portfolio. Nevertheless, the practical significance of the mutual fund the- orem is that a passive investor may view the market index as a reasonable first approxima- tion to an efficient risky portfolio.     CONCEPT C H E C K ☞ QUESTION 1 If there are only a few investors who perform security analysis, and all others hold the market portfolio, M, would the CML still be the efficient CAL for investors who do not engage in secu- rity analysis? Why or why not?       The Risk Premium of the Market Portfolio   In Chapter 7 we discussed how individual investors go about deciding how much to invest in the risky portfolio. Returning now to the decision of how much to invest in portfolio M versus in the risk-free asset, what can we deduce about the equilibrium risk premium of portfolio M? We asserted earlier that the equilibrium risk premium on the market portfolio, E(rM) rf , will be proportional to the average degree of risk aversion of the investor population and the risk of the market portfolio, 2 . Now we can explain this result. Recall that each individual investor chooses a proportion y, allocated to the optimal portfolio M, such that E(rM) rf y .01 A 2   (9.1) In the simplified CAPM economy, risk-free investments involve borrowing and lending among investors. Any borrowing position must be offset by the lending position of the creditor. This means that net borrowing and lending across all investors must be zero, and in consequence the average position in the risky portfolio is 100%, or y- 1. Setting y 1 in equation 9.1 and rearranging, we find that the risk premium on the market portfolio is re- lated to its variance by the average degree of risk aversion: - E(rM) rf .01 A 2 (9.2)