Which statement is NOT true regarding the market portfolio in a competitive market?

• A. The market portfolio is used as a benchmark for evaluating individual asset performance.
• B. The market portfolio contains all assets in the market, weighted by their market values.
• C. Investors in a competitive market can achieve diversification by holding the market portfolio.
• D. The market portfolio only includes risk-free assets.

Answer: (D)

Verified step by step guidance

1. Understand the concept of the market portfolio: it is a portfolio that includes all risky assets available in the market, each weighted according to its market value.
2. Recall that the market portfolio is used as a benchmark in finance to evaluate the performance of individual assets or portfolios, often in models like the Capital Asset Pricing Model (CAPM).
3. Recognize that holding the market portfolio allows investors to achieve diversification because it spreads investment across all available risky assets, reducing unsystematic risk.
4. Identify that the market portfolio does NOT consist only of risk-free assets; instead, it includes all risky assets, while risk-free assets are separate and typically represented by government bonds or similar instruments.
5. Conclude that the statement 'The market portfolio only includes risk-free assets' is NOT true, as it contradicts the fundamental definition of the market portfolio.