What is a key characteristic of theoretical models in finance?

The correct choice highlights that theoretical models in finance are developed using assumptions that aim to capture investment behavior. These models often simplify complex realities by establishing a framework of assumptions about how investors behave under various conditions. This abstraction helps in understanding the underlying mechanisms and potential outcomes in financial markets.

Fundamental to these models is the idea that they are not directly derived from historical data, nor do they analyze current market data in real-time. Instead, they serve to provide a theoretical basis for anticipating how markets might react under certain assumptions. By focusing on the behavior of investors—such as risk aversion, utility maximization, and market efficiency—these models can yield insights that inform investment strategies and decision-making processes.

In essence, the use of assumptions in theoretical models allows financial analysts and practitioners to create scenarios and identify patterns that might not be immediately observable in actual market data. This makes them invaluable tools for both academic research and practical application in finance.