Which of thefollowing assumptions regarding capital market theory allows for the existenceof the market portfolio? All investors:

　　A.       are price takers.

　　B.       have homogeneous expectations.

　　C.       plan for the same, single holdingperiod.

　　Correct Answer: B

　　The homogeneous expectations assumption means that all investorsanalyze securities in the same way and are rational. That is, they use the sameprobability distributions, use the same inputs for future cash flows, andarrive at the same valuations. Because their valuation of all assets isidentical, they will generate the same optimal risky portfolio, which is themarket portfolio.