<p>A market portfolio, also known as the market portfolio theory, is a financial concept that assumes all investors hold a diversified portfolio of all available assets, weighted by their market capitalization. This theory, proposed by Harry Markowitz, forms the basis for modern portfolio theory.</p>

<h2>How It Works</h2>
<p>The market portfolio theory operates on the principle of market efficiency. It postulates that all information about an asset is already reflected in its price. Therefore, no investor can consistently outperform the market by actively selecting securities. Instead, investors should hold a portfolio that mirrors the market, as it is the most efficient and risk-adjusted way to invest.</p>
<p>In practice, creating a market portfolio involves buying all available assets in proportion to their market capitalization. For instance, if a market has 100 companies with total market capitalization of $100 billion, and Company A has a market cap of $10 billion, an investor would allocate 10% of their portfolio to Company A.</p>

<h2>Why It Matters</h2>
<p>The market portfolio theory is significant for several reasons. Firstly, it provides a benchmark for investors to compare their performance. If an investor consistently outperforms the market portfolio, it could indicate that the market is inefficient, or the investor has exceptional skills.</p>
<p>Secondly, the theory has practical implications for portfolio construction. It suggests that investors should diversify their portfolios to reduce risk. By holding a market portfolio, investors can achieve maximum diversification, as they are exposed to all available assets.</p>
<p>Lastly, the market portfolio theory has influenced the development of index funds. These funds aim to track the performance of a specific market, providing investors with a low-cost, passive way to invest in the market portfolio.</p>