Question

The most likely violation of the modern portfolio theory assumptions is: Investors making rational decisions Institutional...

The most likely violation of the modern portfolio theory assumptions is:

Investors making rational decisions

Institutional investors having no impact on prices even when making large trades

Individual investors facing bid and ask prices when they trade

All investors being able to borrow at the risk-free rate of interest

Homework Answers

Answer #1

The most likely violation of the modern portfolio theory assumption is individual investors facing bid and ask prices when they trade.

The reason for choosing this option is that Modern portfolio thery's main assumption is that all the information is available to inverstors and prices of stocks reveal all the information. Due to availability of information, there are no chances for abnormal return and investors are risk-averse and make rational decisions. Individuals facing bid and ask prices leads to abnormal profits, thus it violates the modern portfolio theory assumption.

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