Market Portfolio

A market portfolio is a hypothetical portfolio that includes all assets available in the market, in proportion to their market value. It is often used as a benchmark for other investments.

The market portfolio is a theoretical concept, as it is not possible to invest in all assets in the market. However, it can be approximated by investing in a broad-based index fund.

The market portfolio is important because it represents the overall risk and return of the market. By comparing an investment to the market portfolio, investors can see how it performs relative to the market.

The market portfolio is also used to calculate the expected return and risk of an investment. The expected return of an investment is the average return that the investment is expected to generate over time. The risk of an investment is the volatility of its returns.

The expected return and risk of an investment can be calculated using the capital asset pricing model (CAPM). The CAPM is a model that relates the expected return of an investment to its beta, which is a measure of its risk.

The beta of an investment is the correlation of its returns to the returns of the market portfolio. A beta of 1 means that the investment's returns are perfectly correlated with the returns of the market portfolio. A beta of less than 1 means that the investment's returns are less volatile than the returns of the market portfolio. A beta of greater than 1 means that the investment's returns are more volatile than the returns of the market portfolio.

The market portfolio is an important concept in finance. It is used to benchmark investments, calculate expected returns and risk, and develop investment strategies.