Which of the following statements about the mutual-fund theorem is true? I) It is similar to the separation property.
II) It implies that a passive investment strategy can be efficient.
III) It implies that efficient portfolios can be formed only through active strategies.
IV) It means that professional managers have superior security-selection strategies.
A)I and IV
B)I, II, and IV
C)I and II
D)III and IV

Question

Quizplus · Accepted Answer

The mutual-fund theorem states that investors can achieve diversification and efficient portfolios through investing in mutual funds that hold a variety of stocks or bonds. This theorem is similar to the separation property, as it allows investors to separate the decision-making process of security selection from the decision-making process of portfolio allocation. The mutual-fund theorem implies that a passive investment strategy, such as investing in index funds, can be efficient because it allows investors to hold a diversified portfolio at a low cost. It does not imply that efficient portfolios can only be formed through active strategies, as passive strategies can also be efficient. This theorem does not suggest that professional managers have superior security-selection strategies.

Which of the Following Statements About the Mutual-Fund Theorem Is