Multiple Choice
In a perfectly competitive market, which of the following events typically occur in the market-place?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
In a competitive market, the market portfolio is characterized by which of the following?
A
It is composed solely of the most profitable firms.
B
It contains all available assets in the market, weighted by their market values.
C
It excludes assets with high volatility.
D
It only includes risk-free assets.
Verified step by step guidance1
Understand the concept of a market portfolio in microeconomics and finance: it represents a portfolio that includes all available assets in the market, each weighted according to its market value.
Recognize that the market portfolio is not limited to only the most profitable firms, nor does it exclude assets based on volatility or risk characteristics.
Recall that the market portfolio is a theoretical construct used in models like the Capital Asset Pricing Model (CAPM) to represent the aggregate of all investable assets.
Note that the weighting by market value means that larger firms or assets with higher market capitalization have a greater influence on the portfolio's composition.
Conclude that the correct characterization of the market portfolio is that it contains all available assets in the market, weighted by their market values.
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