I'm trying to understand the relation (if there is any) between the market portfolio, as described by the CAPM theory, and a real portfolio (just like the one I plotted in the image below).
More specifically, my portfolio consists of 5 stocks, which I optimized to get the highest sharpe-ratio (The risk free return used was 5%). Looking at the figure, it is clear that a straight line from the y-intercept at 5% will not be tangent to the red star (the optimal portfolio).
So, can I say the following:
My optimized portfolio (red star) is not the market portfolio
The y-intercept for the tangent line at the red star has no meaning in this case (its value lies between 10% and 15%)
My basic source of confusion is, how do I relate my limited portfolio with the CAPM theory? What can I say, and what I cannot say bout tangent lines and risk-free rates?
Here is the data from the red star portfolio:
Sharpe ratio:1.04530 Expected return: 0.18899 Volatility: 0.17681 Beta: 0.49825
I appreciate any inputs on this, as I'm new to finance. Thank you!