a free fall. As Delta stock gets progressively cheaper, it be- comes ever more attractive and other stocks look relatively less attractive. Ultimately, Delta reaches a price where it is attractive enough to include in the optimal stock portfolio. Such a price adjustment process guarantees that all stocks will be included in the opti- mal portfolio. It shows that all assets have to be included in the market portfolio. The only issue is the price at which investors will be willing to include a stock in their optimal risky portfolio. This may seem a roundabout way to derive a simple result: If all investors hold an identical risky portfolio, this portfolio has to be M, the market portfolio. Our intention, however, is to demonstrate a connection between this result and its underpinnings, the equilibrating process that is fundamental to security market operation.     The Passive Strategy Is Efficient   In Chapter 7 we defined the CML (capital market line) as the CAL (capital allocation line) that is constructed from a money market account (or T-bills) and the market portfolio. Perhaps now you can fully appreciate why the CML is an interesting CAL. In the simple world of the CAPM, M is the optimal tangency portfolio on the efficient frontier, as shown in Figure 9.4. In this scenario the market portfolio that all investors hold is based on the common in- put list, thereby incorporating all relevant information about the universe of securities. This means that investors can skip the trouble of doing specific analysis and obtain an efficient portfolio simply by holding the market portfolio. (Of course, if everyone were to follow this strategy, no one would perform security analysis and this result would no longer hold. We discuss this issue in greater depth in Chapter 12 on market efficiency.) Thus the passive strategy of investing in a market index portfolio is efficient. For this reason, we sometimes call this result a mutual fund theorem. The mutual fund theorem is another incarnation of the separation property discussed in Chapter 8. Assuming that all in- vestors choose to hold a market index mutual fund, we can separate portfolio selection into III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001           CHAPTER 9 The Capital Asset Pricing Model 267     two components-a technological problem, creation of mutual funds by professional man- agers-and a personal problem that depends on an investors risk aversion, allocation of the complete portfolio between the mutual fund and