The correct answer is: A. Investors are risk-averse.
The APT (Arbitrage Pricing Theory) is a model that explains the expected return of a security as a linear function of a number of factors. The APT assumes that investors are risk-averse, which means that they prefer to avoid risk. This assumption is necessary for the APT to hold, as it ensures that investors will demand a premium for holding risky assets.
The other options are not assumptions of the APT. Option B, investors follow the mean-variance rule, is a behavioral assumption that is not necessary for the APT to hold. Option C, short sales are not allowed, is a market structure assumption that is not necessary for the APT to hold. Option D, all investors hold the market portfolio, is a portfolio choice assumption that is not necessary for the APT to hold.
In conclusion, the correct answer is: A. Investors are risk-averse.