In the preceding discussion on the CAL, portfolio M was identified is the universally desirable portfolio of risky assets. It has the property of maximizing return per unit of risk (standard deviation) as the steepest CAL passes through it. What is the nature of this portfolio M? How is it constructed?
Portfolio M refers to !Ill” market portfolio theoretical construct credited to Prof, Eugene we add up the all individual investors, borrowing and lending cancel out other and (If an portfolio I” wealth (If till M). Thus, the portfolio the exactly proportion, are return on the market portfolio weighted of return on all capital assets.
For simplicity, a portfolio containing all a proxy for the market portfolio, all investors hold the same portfolio, (1) no security from it will in out and (b) the proportion of each futurity in the market portfolio equal till market value of the divided by the total market value of all security. If the conditions are not fulfilled prices adjust until the value of the security becomes consistent with its proportion in portfolio. The concept of the capital market line in the capital asset pricing model rests on the notion of the market portfolio.