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Part $1$

When the CAPM correctly prices$$ risk, the market portfolio is an efficient portfolio. Explain why.

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Part $1$

$($Select the best choice$$ below.$)$

A$.$

All investors will want to maximize their Sharpe ratios by picking efficient portfolios. When a riskless asset$$ exists, this means that all investors will pick the same efficient$$ portfolio, and because the sum of all$$ investors' portfolios is the market$$ portfolio, this efficient portfolio must be the market portfolio.

B$.$

When the CAPM$$ holds, the market portfolio is on the security market$$ line, hence it is efficient.

C$.$

When the CAPM$$ holds, the market portfolio is on the capital market$$ line, hence it is efficient.

D$.$

The beta of the market portfolio is one.$$ Furthermore, every investor holds the market portfolio. This means that in$$ aggregate, every$$ investor's portfolio has a beta of$$ one, which implies that the market is efficient.