Review:CAPM Since each investor holds the tangency portfolio as part of his/her overall portfolio,the market portfolio must coincide with the tangency portfolio. Idea of CAPM:the contribution of a single risky asset to the risk of the market portfolio must be proportional to its risk premium. In other words,investors are compensated for exposure to systematic risk. ldiosyncratic risk is not compensated because they can be diversified away. 2010/Yichuan LiuReview: CAPM  Since each investor investor holds the tangency tangency portfolio portfolio as part of his/her overall portfolio, the market portfolio must coincide with the tangency portfolio.  Idea of CAPM: the contribution of a single risky asset to the risk of the market portfolio must be proportional proportional to its risk premium premium.  In other words, investors are compensated for exposure to systematic risk.  Idiosyncratic risk is not compensated because they can be diversified away. 2010 / Yichuan Liu 4