what is a market portfolio 
a market portfolio is a theoretical bundle of investments that includes every type of asset available in the investment universe 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 the basics of market portfolioa market portfolio by nature of being completely diversified is subject only to systematic risk or risk that affects the market as a whole and not to unsystematic risk which is the risk inherent to a particular asset class as a simple example of a theoretical market portfolio assume three companies exist in the stock market company a company b and company c the market capitalization of company a is 2 billion the market capitalization of company b is 5 billion and the market capitalization of company c is 13 billion thus the total market capitalization comes to 20 billion the market portfolio consists of each of these companies which are weighed in the portfolio as follows company a portfolio weight 2 billion 20 billion 10 company b portfolio weight 5 billion 20 billion 25 company c portfolio weight 13 billion 20 billion 65 the market portfolio in the capital asset pricing modelthe market portfolio is an essential component of the capital asset pricing model capm widely used for pricing assets especially equities the capm shows what an asset s expected return should be based on its amount of systematic risk the relationship between these two items is expressed in an equation called the security market line the equation for the security market line is r r f c r m r f where r expected return r f risk free rate c beta of asset in question versus the market portfolio r m expected return of the market portfolio begin aligned r r f beta c r m r f textbf where r text expected return r f text risk free rate beta c text beta of asset in question versus the market portfolio r m text expected return of the market portfolio end aligned r rf c rm rf where r expected returnrf risk free rate c beta of asset in question versus the market portfoliorm expected return of the market portfolio for example if the risk free rate is 3 the expected return of the market portfolio is 10 and the beta of the asset with respect to the market portfolio is 1 2 the expected return of the asset is expected return 3 1 2 x 10 3 3 8 4 11 4 limitations of a market portfolioeconomist richard roll suggested in a 1977 paper that it is impossible to create a truly diversified market portfolio in practice because this portfolio would need to contain a portion of every asset in the world including collectibles commodities and basically any item that has marketable value this argument known as roll s critique suggests that even a broad based market portfolio can only be an index at best and as such only approximate full diversification real world example of a market portfolioin a 2017 study historical returns of the market portfolio the economists ronald q doeswijk trevin lam and laurens swinkels attempted to document how a global multi asset portfolio has performed over the period 1960 to 2017 they found that real compounded returns varied from 2 87 to 4 93 depending on the currency used in u s dollars the return was 4 45 