The separation principle states that an investor will:
A) choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return.
B) choose an efficient portfolio based on individual risk tolerance or utility.
C) never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time.
D) invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance.

Question

Quizplus · Accepted Answer

The separation principle suggests that investors will choose a combination of the riskless asset and the tangency portfolio (market portfolio) based on their risk tolerance, allowing them to achieve their desired risk-return profile.

The Separation Principle States That an Investor Will