<span>b. He has been killed.
The mechanicals see a monster (really just Bottom with a donkey's head from Puck's spell) and all scatter, screaming and running away. When they can't find Bottom they assume that he has been killed in the woods, probably by the monster. </span>
The prounoun "that" is used as a demonstrative pronoun in your sentence because it is used to demonstrate, or indicate something. In your sentence, that indicates which horse is your favorite.
