Final answer:
The market portfolio is not simply a mix of risky and risk-free investments, nor is it defined by a zero Sharpe ratio. Instead, it is a comprehensive portfolio of all risky investments in the market, with each investment weighted by its market value.
Step-by-step explanation:
The market portfolio is a hypothetical portfolio consisting of all available risky investments, weighted proportionally by their market value.
In investment theory, particularly the Capital Asset Pricing Model (CAPM), the market portfolio is considered to be very important. The CAPM suggests that the market portfolio is on the efficient frontier, meaning it gives the highest possible expected return for its level of risk. It is composed of all risky assets in the market, each one held in proportion to its market capitalization.
This is different from a portfolio that combines both risky and risk-free investments, which individual investors might hold in order to adjust to their personal risk tolerance.
As for the other options, a portfolio that has a better return than the average market return is not necessarily the market portfolio, since the market portfolio's return is the aggregate average return of all included assets. A portfolio with a zero Sharpe ratio indicates no excess return per unit of risk and is not what defines the market portfolio. Lastly, although investors often combine risky and risk-free investments to achieve their desired level of risk, the market portfolio itself only includes the risky assets.