DEFINITION of 'Homogeneous Expectations'
An assumption in Markowitz Portfolio Theory that all investors will have the same expectations and make the same choices given a particular set of circumstances. The assumption of homogeneous expectations states that all investors will have the same expectations regarding inputs used to develop efficient portfolios, including asset returns, variances and covariances. For example, if shown several investment plans with different returns at a particular risk, investors will choose the plan that boasts the highest return. Similarly, if investors are shown plans that have different risks but the same returns, investors will choose the plan that has the lowest risk.
INVESTOPEDIA EXPLAINS 'Homogeneous Expectations'
Harry Max Markowitz is an American economist known for his pioneering work in the theory of financial economics, and the publication of his essay "Portfolio Selection" (1952) and his 1959 book, "Portfolio Selection: Efficient Diversification." He was awarded the John von Neumann Theory Prize in 1989 and the Nobel Price in Economics in 1990.
Modern Portfolio Theory (MPT) was pioneered by Markowitz. The theory states that riskaverse investors can develop portfolios that optimize or maximize expected returns based on the particular level of market risk. According to the theory, there are four steps involved in the construction of a portfolio:
1. Security valuation  Describing various assets in terms of expected returns and risks
2. Asset allocation  Distributing various asset classes within the portfolio
3. Portfolio optimization  Reconciling risk and return in the portfolio
4. Performance measurement  Dividing each asset's performance into marketrelated and industryrelated classifications
Markowitz's work altered the way that people invested, emphasizing the importance of investment portfolios, risk and the relationships between securities and diversification. His work has been fundamental to the development of the capital asset pricing model.
Markowitz also described the "efficient frontier," a set of optimal portfolios that provide the best expected returns for a defined risk level or the lowest risk level for a defined expected return. Portfolios that fall outside the efficient frontier are considered suboptimal because they either carry too much risk relative to the return or too little return relative to the risk.

Portfolio
A grouping of financial assets such as stocks, bonds and cash ... 
Efficient Frontier
A set of optimal portfolios that offers the highest expected ... 
Harry Markowitz
A Nobel Memorial Prize winning economist who devised the modern ... 
Asset Allocation
An investment strategy that aims to balance risk and reward by ... 
Modern Portfolio Theory  MPT
A theory on how riskaverse investors can construct portfolios ... 
Markowitz Efficient Set
A set of portfolios with returns that are maximized for a given ...

What are the primary sources of market risk?
Market risk is the risk of loss due to the factors that affect an entire market or asset class. Market risk is also known ... Read Full Answer >> 
How does beta measure a stock's market risk?
Beta is a statistical measure of the volatility of a stock versus the overall market. It's generally used as both a measure ... Read Full Answer >> 
How does the risk of investing in the electronics sector compare to the broader market?
The risk of investing in the electronics sector closely approximates the risk of investing in the broader market. The electronics ... Read Full Answer >> 
What is the Federal Reserve Board's market risk capital rule?
The Federal Reserve Board’s market risk capital rule, or MRR, sets forth the capital requirements for banking organizations ... Read Full Answer >> 
What are the different sources of business risk?
A certain risk level is inherent in running a business. A company cannot completely eliminate risk, but it can control or ... Read Full Answer >> 
How are swap agreements financed?
Since swap agreements involve the exchange of future cash flows and are initially set at zero, there is no real financing ... Read Full Answer >>

Bonds & Fixed Income
Find The Highest Returns With The Sharpe Ratio
Learn how to follow the efficient frontier to increase your chances of successful investing. 
Fundamental Analysis
The Capital Asset Pricing Model: An Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Insurance
The Dangers Of OverDiversifying Your Portfolio
If you diversify too much, you might not lose much, but you won't gain much either. 
Active Trading
Modern Portfolio Theory: Why It's Still Hip
See why investors today still follow this old set of principles that reduce risk and increase returns through diversification. 
Economics
What Is Supply?
Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics. 
Economics
Modified Internal Rate of Return (MIRR)
Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation. 
Trading Strategies
Understanding Bottoms & Bottoming Patterns
Analysis lowers the risk of bottom picking by identifying common characteristics of securities transitioning from downtrends to uptrends. 
Economics
What is Adverse Selection?
Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and financerelated activities. 
Economics
Understanding the Fisher Effect
The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. 
Fundamental Analysis
Explaining the Geometric Mean
The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.