Market Portfolio

AAA

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).

INVESTOPEDIA EXPLAINS '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)
RELATED TERMS
  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. Asset Allocation

    An investment strategy that aims to balance risk and reward by ...
  6. Market Risk Premium

    The difference between the expected return on a market portfolio ...
RELATED FAQS
  1. How do I interpret a Security Market Line (SML) graph?

    The Capital Asset Pricing Model, or CAPM, shows the relationship between an asset's expected return and beta. The foundational ... Read Full Answer >>
  2. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  3. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  4. What percentage of a diversified portfolio should large cap stocks comprise?

    The percentage of a diversified investment portfolio that should consist of large-cap stocks depends on an individual investor's ... Read Full Answer >>
  5. What types of assets produce negative portfolio variance?

    Assets that have a negative correlation with each other produce negative portfolio variance. Variance is one measure of the ... Read Full Answer >>
  6. How can I determine if my portfolio is overweight in certain sectors?

    You can determine if your portfolio is overweight in certain sectors by performing a regular review of your portfolio allocations. ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Achieving Better Returns In Your Portfolio

    We look at three risk factors that best explain the bulk of equity performance.
  2. Personal Finance

    Rebalance Your Portfolio To Stay On Track

    Like a tune-up for a car, this re-alignment should minimize trouble down the road.
  3. Investing Basics

    Broadening Your Portfolio's Borders

    Find out what type of international fund might suit your needs in gaining exposure to foreign markets.
  4. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  5. Mutual Funds & ETFs

    4 Ways To Use ETFs In Your Portfolio

    To take full advantage of these vehicles, you need to know how they can fulfill certain strategies.
  6. Investing Basics

    Introduction To Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  7. Bonds & Fixed Income

    Find The Highest Returns With The Sharpe Ratio

    Learn how to follow the efficient frontier to increase your chances of successful investing.
  8. Investing Basics

    Explaining Assets Under Management

    Assets under management is a metric that measures the market value of assets that an investment company manages for investors.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P 500 Trust

    Find out more about the SPDR S&P 500 ETF Trust, the characteristics of the exchange traded fund and the suitability of investing in the fund.
  10. Professionals

    Target-Date vs. Index Funds: Is One Better?

    Target-date and index funds are difficult to compare because they differ in both structure and objective, though investors can compare two specific funds.

You May Also Like

Hot Definitions
  1. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  3. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  4. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  5. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  6. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!