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
E) II and IV

Question

Quizplus · Accepted Answer

The mutual-fund theorem is part of the Capital Asset Pricing Model (CAPM) and suggests that investors can achieve optimal diversification by holding a combination of the market portfolio and a risk-free asset. This aligns with the separation property (I), which states that the investment decision can be separated into two independent tasks: choosing the optimal portfolio of risky assets and deciding how to split the total investment between this risky portfolio and a risk-free asset. It also implies that a passive investment strategy, such as holding a market index fund, can be efficient (II), contradicting statements III and IV, which suggest the necessity of active strategies and superior security-selection skills.

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