The "market portfolio," the portfolio of all endowments in the world, has great significance in the capital asset pricing model (CAPM) in finance. The Sharpe-Lintner CAPM characterization of optimal risk sharing implies that in equilibrium no one will be subject to a random shock that is not shared by everyone else. ^ Thus, the CAPM gives us the "mutual fund theorem," which asserts that only one risky portfolio need be available to individual investors, the mutual fund that holds the market portfolio. In this paper we seek further clarification of the significance of the market portfolio beyond the bounds of the restrictive assumptions of the CAPM.
This report has been published in Oxford Journals, Social Sciences, Review of Financial Studies, Volume 13, Issue 2, pp. 301-329
Athanasoulis, Stefano G. and Shiller, Robert J., "The Significance of the Market Portfolio" (1997). ISU Economic Report Series. 41.