sighted) in that it ignores everything that might happen after the end of the single- period horizon. Myopic behavior is, in general, suboptimal. 3. Investments are limited to a universe of publicly traded financial assets, such as stocks and bonds, and to risk-free borrowing or lending arrangements. This assumption rules out investment in nontraded assets such as education (human capital), private enterprises, and governmentally funded assets such as town halls and international airports. It is assumed also that investors may borrow or lend any amount at a fixed, risk-free rate. 4. Investors pay no taxes on returns and no transaction costs (commissions and service charges) on trades in securities. In reality, of course, we know that investors are in different tax brackets and that this may govern the type of assets in which they invest. For example, tax implications may differ depending on whether the income is from interest, dividends, or capital gains. Furthermore, actual trading is costly, and commissions and fees depend on the size of the trade and the good standing of the individual investor. 5. All investors are rational mean-variance optimizers, meaning that they all use the Markowitz portfolio selection model. 6. All investors analyze securities in the same way and share the same economic view of the world. The result is identical estimates of the probability distribution of future cash flows from investing in the available securities; that is, for any set of security prices, they all derive the same input list to feed into the Markowitz model. Given a set of security prices and the risk-free interest rate, all investors use the same expected returns and covariance matrix of security returns to generate the efficient frontier and the unique optimal risky portfolio. This assumption is often referred to as homogeneous expectations or beliefs.   These assumptions represent the "if" of our "what if" analysis. Obviously, they ignore many real-world complexities. With these assumptions, however, we can gain some pow- erful insights into the nature of equilibrium in security markets. We can summarize the equilibrium that will prevail in this hypothetical world of securities and investors briefly. The rest of the chapter explains and elaborates on these implications.   1. All investors will choose to hold a portfolio of risky assets in proportions that duplicate representation of the assets in the market portfolio (M), which includes all traded assets. For simplicity, we generally refer to all risky assets as stocks. The proportion of each stock in the market portfolio equals the market value of the III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001