Market portfolio
Encyclopedia
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.
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an 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
Richard Roll
Richard Roll is an American economist, best known for his work on portfolio theory and asset pricing, both theoretical and empirical....
'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
DAX
The DAX is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system...
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
Capital asset pricing model
In finance, the capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk...
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.
See also
- Capital market line
- Capital allocation lineCapital allocation lineCapital allocation line is a graph created by investors to measure the risk of risky and risk-free assets. The graph displays to the investors on the return they can make by taking on a certain level of risk...
- Security market lineSecurity market lineSecurity market line is the graphical representation of the Capital asset pricing model. It displays the expected rate of return of an individual security as a function of systematic, non-diversifiable risk .-See also:...
- Security characteristic lineSecurity characteristic lineSecurity characteristic line is a regression line, plotting performance of a particular security or portfolio against that of the market portfolio at every point in time. The SCL is plotted on a graph where the Y-axis is the excess return on a security over the risk-free return and the X-axis is...