If investors possess homogeneous expectations over all assets in the market portfolio,when riskless lending and borrowing is allowed,the market portfolio is defined to:
A) be the same portfolio of risky assets chosen by all investors.
B) have the securities weighted by their market value proportions.
C) be a diversified portfolio.
D) All of these.
E) None of these.

Question

Quizplus · Accepted Answer

If investors possess homogeneous expectations, they all believe in the same information about the future. When riskless lending and borrowing is allowed, investors can borrow or lend at the risk-free rate to reach their desired level of risk. As a result, all investors have the same efficient frontier, and the same feasible set. They all choose the same optimal risky portfolio and combine it with the risk-free asset to form their optimal portfolio on the capital market line. Therefore, the market portfolio consists of the same portfolio of risky assets chosen by all investors. It is also diversified, as investors hold a mix of risky assets in their optimal portfolio. The market portfolio's weights are based on the market values of the securities in the market. Therefore, all of these choices are correct.

If Investors Possess Homogeneous Expectations Over All Assets in the Market