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The market portfolio is a
theoretical notion used in portfolio theory.
Consider a universe of risky
investments available to an investor. The market portfolio is a
portfolio consisting of every issue weighted proportionality to
the total market
value of that issue outstanding in the
market.
For example, if we considered all the stocks that
comprise the S&P 500 stock index as our universe, then a
(market capitalization weighted) S&P 500 index fund would
represent a market portfolio.
A practical shortcoming of the notion of a market portfolio is the fact
that it depends upon the universe of risky assets considered. In many
applications, this is limited to domestic equities, but it could be extended to
include international equities, debt, real estate, etc.
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beta
A metric of the systematic risk of a portfolio.
capital asset pricing
model—a model for asset pricing and portfolio construction.
capital market line—a
set of portfolios obtainable by leveraging or deleveraging
positions in a "super-efficient" portfolio.
efficient frontier—a
set of portfolios that each maximize expected return for a given
level of risk.
efficient market
hypothesis A financial theory that markets are efficient in the sense that
prices reflect all available information.
portfolio theory—a body of
theory for how risk averse investors construct portfolios. |
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The following books offer different
perspectives on the role of the market portfolio in portfolio
theory. Bernstein (1993)
is a must-read history of finance during the 20th century. Body,
Kane and Marcus (2004)
is the standard university text on finance.
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Investments |
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Zvi Bodie, Alex Kane, Alan J. Marcus |
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quality |
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technical |
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2004 |
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