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What is a Market Portfolio?

MPT uses diversification to reduce the risk of a portfolio without giving up high returns.
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  • Written By: N. Madison
  • Edited By: Niki Foster
  • Last Modified Date: 23 October 2014
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A market portfolio is a theoretical portfolio in which every available type of asset is included at a level proportional to its market value. An investment portfolio, which is a group of investments, is owned by one individual or organization. A typical one may include a variety of assets, but usually does not include all asset types. A market portfolio, however, literally includes every asset that exists in the market.

The market value of an investment is described as its current price on the market. The term is also used to refer to the amount for which an asset could presumably be resold. In a market portfolio, investments are held in proportion to their market values in relation to the full value of all included assets.

Often, this concept is discussed in theoretical terms only. For investment purposes, a true one would need to include every conceivable asset, and as such, it would cover the world market. The concept is important in a variety of financial theories, including Modern Portfolio Theory (MPT). According to the MPT, investors should concentrate on choosing portfolios based on overall risk-reward concepts, rather than focusing on the attractiveness of individual securities.

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MPT involves the concept of the efficient frontier on which the market portfolio sits. Introduced by Harry Markowitz, the pioneer of MPT, the efficient frontier is a group of optimal portfolios that serve to maximize the expected return for a given level of risk. The Sharpe ratio is a term used to indicate the level of additional return offered by a portfolio, relative to the level of risk it entails. The market or super-efficient portfolio has the highest Sharpe ratio on the efficient frontier.

When combined with the risk-free asset, it is said that the market portfolio will produce a return rate above the efficient frontier. The risk-free asset is a hypothetical concept. Essentially, this portfolio would provide for higher return rates than a riskier portfolio on the frontier.

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Bhutan
Post 5

BrickBack- I love real estate. My investment strategy is to buy rental properties and use the income generated from the properties to retire with.

I understand real estate well, but the stock market makes me nervous. I like to have a concrete asset that I can touch, and if the value goes down, you can always rent it out for extra income.

You can’t do that with a stock. Now is really the best time to get into the real estate market because prices in many markets are at 2000 levels.

BrickBack
Post 4

Subway11-With the continued worries regarding the economy, many investors have looked at commodity mutual funds in an effort to hedge against future devaluation of the dollar and an increase in inflation.

People generally go to gold in particular because it usually holds its value when the dollar does not.

Often purchases of gold go up when people do not have faith in the federal government, which is what we are experiencing today. Sometimes investors will go to managed futures.

The thing to remember is that you should never invest in something that you do not understand because you can lose a lot of money and lose control of your investments.

subway11
Post 3

Oasis11-It is really a good idea to determine the level of risk that you want to take on. Some people prefer safe investments like bonds because they can not see their market capital fluctuate.

Many fund companies offer investors quizzes to determine their risk tolerance level. You can also view the riskiness of a fund by the beta rating.

A beta rating of 1.0 means that the fund offers average risk, while a fund under a 1.0 rating indicates a lower risk investment. A beta rating exceeding 1.0 indicates that the fund might be volitle and riskier than average.

oasis11
Post 2

A great investment strategy if you earn a substantial income is investing in municipal bonds.

Municipal bonds are government obligation bonds that offer up to 5% return on your investment. Usually you receive two biannual interest payments from the government tax free.

For example, if you have $1,000,000 and invest it in a general obligation bond, then you will receive two payments of $25,000 a year tax free if the interest rate on the bond is 5%.

Marketing investing is also important to diversify your portfolio. Investing in mutual bond funds can also offer income as well as investing in high yielding mutual funds.

If you are interested in a fund the best thing to do is to obtain a prospectus from the fund company. A prospectus tells you who the fund managers are along with all of the holdings of the mutual fund. If a fund manager has been with the fund a long time then the fund is stable.

The great thing about mutual funds is that they offer stock diversification which lowers your market capital risk.

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