In the arbitrage pricing theory what is the "market portfolio"?
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in the arbitrage pricing theory what is the "market portfolio"
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Answer:
Depending on the context, it is the portfolio that consists of a market cap weighted investment in all the securities in the universe you are looking at. For example, in the US stock market it would be a portfolio that contains a market cap weighted investment in all traded stocks (and it gets fuzzy on the edges because these pricing theories don't easily deal with things like scam stocks, illiquidity, ETF's that aren't stocks, and so on). Usually people just assume that the "market portfolio" is the S&P 500 for better or for worse. (Using the S&P 500 as the "market portfolio" is not nearly as big a problem in APT as, for example, being unable to specify what the other factors are)
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