Market Portfolio


DEFINITION of '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 the expected return of the market as a whole. Because a market portfolio is completely diversified, it is subject only to systematic risk (risk that affects the market as a whole) and not to unsystematic risk (the risk inherent to a particular asset class).

BREAKING DOWN 'Market Portfolio'

Let's say the entire world financial market consists of three stocks: those of Company A, Company B and Company C.

  • Company A's market capitalization is $1 billion
  • Company B's market capitalization is $2 billion
  • Company C's market capitalization is $3 billion

The total market portfolio would then consist of the following:

  • 17% Company A stock ($1 billion / $6 billion)
  • 33% Company B stock ($2 billion / $6 billion)
  • 50% Company C stock ($3 billion / $6 billion)
  1. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. ...
  2. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  3. International Portfolio

    A grouping of investment assets that focuses on securities from ...
  4. Permanent Portfolio

    A portfolio construction theory devised by free-market investment ...
  5. Market Risk Premium

    The difference between the expected return on a market portfolio ...
  6. Asset Allocation

    An investment strategy that aims to balance risk and reward by ...
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