What is a market portfolio?

A market portfolio is an assumed or virtual portfolio where every available type of asset is included in proportion to its market value. An investment portfolio is a group of investments that are owned and managed by one individual or organization. A typical investment portfolio may include numerous types of assets, but usually, it does not include all asset types. A market portfolio, however, virtually includes every asset that is available in the market.

How is the market portfolio managed?

A market portfolio is created to have the right mix of asset classes to maximize the returns from the investment and to minimize the manageable unsystematic risk. Portfolio creation and management are two different criteria, whereas creation is done for one time while creating the portfolio, and management is done on a regular basis according to the market dynamics.

Portfolio management includes continuous monitoring, and amendments are necessarily made to achieve maximum return while taking minimum risks.

Actively managing the portfolio has the following implications −

  • Income is generated for a longer duration and risks are cushioned.

  • Investment and market strategies can be used to rebalance the securities.

  • Portfolios can be customized and managed on a real-time basis.

  • Management also allows investigation of the assets which can add more returns.

What are the types of the market portfolios?

  • Defensive portfolio – In a defensive portfolio, the beta of securities is comparatively low. The idea of having a defensive portfolio is to save the principal amount invested. In such a type of portfolio, the stocks that do not relate to the market movements are selected. The investors aim to minimize the risk and are ready to gain minimum returns.

  • Aggressive portfolio – The aggressive portfolio takes high risk for higher returns. The beta here is high, and the advantage of price fluctuations of stocks is used to earn profits. Here, investors monitor the portfolio continuously to manage high amounts of risk.

  • Income portfolio – This portfolio focuses on the dividend as income from investments. The cash flow of the investment is generated through interest or dividends distributed by the companies. The assets and securities of an income portfolio are mostly affected by economic situations.

  • Speculative portfolio – It is the riskiest investment strategy as the investments are made either during Initial Public Offerings (IPO) or are based on market rumors. The expectations that breakthroughs will occur due to technology or new business strategy are taken into consideration in this type of portfolio.

  • Growth portfolio – The Growth portfolio includes a projection of significant growth or is anticipated to grow in the near future due to present decisions. The risk component in this type of portfolio is high and so, the rewards are also high.

  • Value portfolio – This type of portfolio consists of securities that can be bought at a lower price after a bargain. In the time of economic downturn, the price of these securities goes so down that investors shift their investment to other stocks. After the economic revival, these securities usually offer considerable income to investors.