Market Portfolio

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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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