Market Portfolio
A market portfolio is a theoretical portfolio that includes all available assets in the market, weighted according to their market value. It represents the entire market's risk and return profile and is often used as a benchmark in financial models like the Capital Asset Pricing Model (CAPM). In practice, index funds or exchange-traded funds (ETFs) tracking major stock indices like the S&P 500 serve as proxies for the market portfolio.
Example
An investor seeking to replicate the performance of the market portfolio might invest in an index fund that tracks the S&P 500, reflecting the collective risk and return of the market.
Key points
• A theoretical portfolio that includes all assets in the market, weighted by their market value.
• Used as a benchmark in models like CAPM to assess expected returns.
• Index funds tracking major stock indices are often used as practical proxies.
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