As to my understanding, the CAPM assumes that all investors behave as described in the portfolio theory. Consequently, all investors hold a combination of the risk-free investment and the efficient portfolio (the portfolio with the highest Sharp ratio). I have two questions:
- It is said that CAPM is an equilibrium model. What exactly does that mean in this context?
- If it is assumed that all investors hold the efficient portfolio (only with the distinction of how large the share of the portfolio is compared to the risk-free investment), why should an investor use the model to calculate the expected return on an individual stock? The stock is already contained in the Market Portfolio, which is held by every investor. Investing a higher amount in a stock shpuld consequently lead to a deviation from the market portfolio(?) Wouldn't the use of the model then argue against its assumption?