Investors with homogeneous expectations are rational and use the same probability distribution, the same cash flow inputs, and thus the same valuations. As a result, they produce the same optimal risk portfolio, i.e., the market portfolio.

Model risk is the risk of valuation error due to improper use of a model. For example, using a DDM (Dividend Discount Model) to value a company whose growth is not constant. The risk-free rate is usually the appropriate rate used to discount government bonds. While government bonds generally do not default, their returns are certainly risky.

The assumption of thin tails in the distribution of returns, which is not the case, as well as the assumption of symmetry in the asymmetric distribution, are both forms of model risk.

Value at Risk (VaR) indicates the probability that losses will reach at least a certain level over a period of time. A 10% VaR of USD 1 million for one day means that 10% of the time the firm is expected to lose at least USD 1 million in one day.