According to portfolio theory,which of the following assumptions is not essential to the equilibrium pricing of risky assets?
A)All investors have the same estimate of expected returns and variance of expected returns on each asset.
B)All investors have a common single-period time horizon for investment decisions.
C)All assets are traded in perfect markets.
D)All investors can sell short assets (sell an asset first and then purchase later).

Question

Quizplus · Accepted Answer

All of the other assumptions (homogeneous expectations, common time horizon, and perfect markets) are necessary for equilibrium pricing according to portfolio theory. However, the ability to sell short is not essential to the theory, as there are alternative ways to achieve similar risk-reducing effects (such as using options or borrowing to invest).

According to Portfolio Theory,which of the Following Assumptions Is Not