Is the Market Portfolio Affected by Individual Investors' Preference and Wealth?
15 Pages Posted: 12 Jul 2021 Last revised: 14 Aug 2021
Date Written: August 11, 2021
Merton (1990, p.44) claims that the market portfolio can be constructed without the knowledge of preferences and the distribution of wealth. However, the analytical equilibrium solution to the CAPM market reveals that it is not true. Investors' preferences and wealth affect the equilibrium price of the market, they do not affect the mathematical form of the CAPM formula, but change the values of the variables in the formula.
Keywords: CAPM, Market Portfolio, Two Fund Separation, Semi-equilibrium Pricing, Multiple Equilibriums
JEL Classification: G12
Suggested Citation: Suggested Citation