If there are restrictions on short selling and borrowing at the risk-free rate, we would expect to see that:
A. all investors hold the same market portfolio as predicted by the CAPM.
B. highly risk-averse individuals tend to hold heavily diversified portfolios, while those with less risk aversion tend to concentrate their portfolios.
C. less risk-averse individuals tend to hold heavily diversified portfolios, while those with more risk aversion tend to concentrate their portfolios.
D. both highly risk-averse individuals and those with less risk aversion tend to concentrate their portfolios.
Answer:B
Restrictions on short selling or borrowing at the risk-free rate make investors construct portfolios with considerably different compositions. Highly risk-averse individuals tend to hold heavily diversified portfolios, while those with less risk aversion tend to concentrate their portfolios.