I have seen "market portfolio" defined online (Wikipedia/Investopedia) as the bundle of all available investments where the assets are each weighted in proportion to their existence in the market. I have also seen (in the CFA Level 1 curriculum reading on Capital Market Theory) that the "market portfolio" is the optimal risky portfolio, plotted on the Markowitz Efficient Frontier (MEF). To my mind, these definitions contradict: there can be only one way to weight all assets in proportion to their existence in the market, yet, for a change in the risk free rate, we would [almost] always see a new optimal risky portfolio as the tangent between the MEF and the Capital Market Line (CML) moves. What am I missing?

  • $\begingroup$ "there can be only one way to weight all assets in proportion to their existence in the market" is not correct. As the market reprices the securities, the weights change accordingly. If "the market" wants to reduce the weight of AAPL in the market portfolio, it will send the price per share of AAPL down. The weights are based on market value of each company's outstanding shares, nt the number of shares. $\endgroup$ – Alex C Nov 15 '18 at 1:31
  • $\begingroup$ I get the point about weighting. But the "market portfolio" in that case would only indicate the market value weighted average of risk adjusted returns, and if it's an average then surely some Sharpe ratios are above and some are below? It cannot be on the MEF but it can always be moving towards the MEF via some kind of demand-supply equilibrium action. $\endgroup$ – Jono Nov 15 '18 at 8:05
  • $\begingroup$ If you think the whole market as a zero sum game, if you own all of it, you have indeed zero profit and, of course, zero loss beyond the total value of the market itself. In this sense, any proportion of this idealized portfolio is the least risky way of following "the whole market value". $\endgroup$ – Ailton Andrade de Oliveira Nov 18 '18 at 23:19

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