Timeline for Why weigh assets by market values in CAPM?
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| May 28, 2022 at 16:31 | comment | added | nbbo2 | For a stupid example: suppose every investor believes "do not invest in any stocks except TSLA". This is the common rule they all follow. Then the prices of all stocks will crash to zero (no one wants them) except for TSLA which will be in high demand. TSLA will represent 100% of stocks market value. And lo and behold it is true: investors allocate to stocks in proportion to their market value (they invest 100% in TSLA). Any common rule adopted by all investors will have this effect. | |
| May 28, 2022 at 6:54 | comment | added | Harsh Sharma | Hi @nbbo2 Apologies for ignorance. Can you please simplify this a bit? I couldn't understand what you meant to say. Thanks in advance! | |
| May 26, 2022 at 17:16 | comment | added | nbbo2 | It is not just for the CAPM. If the supply of stocks is fixed and all investors follow the same allocation rule (CAPM or something else), in equilibrium the prices of stocks will be such that each investor holds assets in proportion to their market values. It is the result of demand aggregation over investors who use the same decision rule in alocating to stocks. | |
| May 26, 2022 at 15:26 | history | asked | Harsh Sharma | CC BY-SA 4.0 |