Tangency portfolio
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The portfolio that maximizes the Sharpe ratio; the market portfolio in CAPM.
Tangency portfolio in plain English
Think of every possible mix of investments as a menu, and you want the mix that gives you the most reward for each unit of risk you take on — the best "bang for your buck." The Sharpe ratio measures exactly that (extra return per unit of risk), and the tangency portfolio is the single mix that scores highest on it. In one famous theory (the CAPM), that ideal mix turns out to be the whole market itself — owning a little bit of everything. It's the sweet-spot recipe: not the flashiest ingredient alone, but the blend that tastes best per calorie.
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