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Except for the fact that in equilibrium demand must equal supply, I do not understand why, by chance, this tangency portfolio is the market portfolio. Do you have any idea?

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The tangency portfolio is the portfolio which maximises the Sharpe ratio in the Markowitz setting. It is assumed that all participants in this setting are rational agents and maximizing the Sharpe ratio is a rational choice hence everyone would opt to choose this portfolio weighting. Since everyone (the whole market) has this portfolio weighting, we also call it the market portfolio.

HTH

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  • $\begingroup$ Thank you, Julie. That is very clear! $\endgroup$
    – Dadoo
    Feb 4, 2022 at 0:18

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