Market portfolio is a portfolio consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market, with the necessary assumption that these assets are infinitely divisible.
Richard Roll's critique (1977) states that this is only a theoretical concept, as to create a market portfolio for investment purposes in practice would necessarily include every single possible available asset, including real estate, precious metals, stamp collections, jewelry, and anything with any worth, as the theoretical market being referred to would be the world market. As a result, proxies for the market (such as the FTSE100 in the UK, DAX in Germany or the S&P500 in the US) are used in practice by investors. Roll's critique states that these proxies cannot provide an accurate representation of the entire market.
The concept of a market portfolio plays an important role in many financial theories and models, including the Capital asset pricing model where it is the only fund in which investors need to invest, to be supplemented only by a risk-free asset, depending upon each investor's attitude towards risk.
- Capital market line
- Capital allocation line
- Security market line
- Security characteristic line
Financial risk and financial risk management Categories Financial risk modeling Basic concepts
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Market Portfolio — A theoretical bundle of investments that includes every type of asset available in the world financial market, with each asset weighted in proportion to its total presence in the market. The expected return of a market portfolio is identical to… … Investment dictionary
Market portfolio — A portfolio consisting of all assets available to investors, with each asset held in proportion to its market value relative to the total market value of all assets. The New York Times Financial Glossary … Financial and business terms
market portfolio — A portfolio consisting of all assets available to investors, with each asset held in proportion to its market value relative to the total market value of all assets. Bloomberg Financial Dictionary … Financial and business terms
market portfolio — See Markowitz model … Big dictionary of business and management
Excess return on the market portfolio — The difference between the return on the market portfolio and the riskless rate. The New York Times Financial Glossary … Financial and business terms
excess return on the market portfolio — Difference between the return on the market portfolio and the riskless rate. Bloomberg Financial Dictionary … Financial and business terms
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Portfolio (finance) — In finance, a portfolio is an appropriate mix of or collection of investments held by an institution or a private individual. Holding a portfolio is part of an investment and risk limiting strategy called diversification. By owning several assets … Wikipedia