Practically, we use major stock market indexes as a proxy for the market. Examples of tradable assets that are not investable include Class A shares on the Shanghai Stock Exchange that are not available for foreign investors. Examples of non-tradable assets include the Eiffel Tower and human capital. The market portfolio should contain as many assets as possible, but it is not practical to include all assets in a single risky portfolio because not all assets are tradable and not all tradable assets are investable. Examples include stocks, bonds, real estate, etc. Theoretically, the market includes all risky assets or anything that has value. At the point where the CML intersects y-axis, 100% is invested in the risk-free asset and its weight decreases as we go up along the CML. The CML is a special case of the CAL where the efficient portfolio is the market portfolio.Īny point along the CML is a combination of the risk-free asset and the market portfolio. This is the optimal risky portfolio when all investors have the same expectations. The point where this capital allocation line is tangential to the efficient frontier is called the market portfolio.

If there is one efficient frontier, there will be only one capital allocation line. Since all investors have the same expectations, they will construct only one efficient frontier. Capital Market Theory: The Capital Market Line This means the calculation to arrive at optimal risky portfolio for all investors would be the same.ģ. With homogeneity of expectations, all investors have the same views on risk, return, price, cash flows, and the correlation between the two assets.

For example, assume there are two securities.It means that all investors have the same economic expectations for an asset.The answer is yes, if there is homogeneity of expectations. We now explore whether a unique optimal risky portfolio exists for all investors.

Cal vs cml