Question: A stock market comprises 2400 shares of stock A and 2400 shares of stock B. The share prices for stocks A and B are $15 and $5, respectively. What is the capitalization of the market portfolio?
A) $43,200
B) $48,000
C) $55,200
D) $52,800
Option B. $48000 is the capitalization of the market portfolio. Capitalization of market portfolio = (Number of shares of each type of stock * Price per share) = (2400 * $15) + (2400 * $5) = $48000. A market portfolio is a theoretical bundle of investments containing all types of assets available in the investment universe, with each asset weighted proportionally to its overall market presence. The expected return of the market portfolio is the same as the expected return of the market as a whole. The market portfolio is an efficient portfolio. Its allocation provides a single optimal mix of risk assets. The expected return of each asset follows a simple linear relationship with the expected return of the market portfolio. At CAPM, the market portfolio has the highest possible Sharpe ratio, making it the best investment.
Understanding the Market Portfolio
In finance, a market portfolio is a collection of all assets in the financial market, weighted according to their market value. This means that each asset's weight in the market portfolio is proportional to its share of the total market value. By holding a market portfolio, investors are essentially investing in the entire market rather than individual securities.
Capitalization Calculation
The capitalization of a market portfolio can be calculated by multiplying the number of shares of each type of stock by the price per share. In this case, with 2400 shares of stock A priced at $15 per share and 2400 shares of stock B priced at $5 per share, the capitalization is determined as follows:
Capitalization of market portfolio = (2400 * $15) + (2400 * $5) = $48000.
Efficient Portfolio
The market portfolio is considered an efficient portfolio because it offers the optimal mix of risk and return. By holding the market portfolio, investors can achieve the highest possible level of diversification and risk-adjusted return. The efficient frontier represents the set of optimal portfolios that offer the highest return for a given level of risk or the lowest risk for a given level of return.
Sharpe Ratio and CAPM
The Capital Asset Pricing Model (CAPM) is a financial model that describes the relationship between risk and expected return. According to CAPM, the market portfolio has the highest possible Sharpe ratio, which indicates the best risk-adjusted return. Investors seeking to maximize their returns for a given level of risk should consider investing in the market portfolio.
In conclusion, the capitalization of the market portfolio is $48000, and it represents an efficient and diversified investment option for investors looking to optimize their risk-return profile in the financial market.