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)never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time.
C)invest only in the riskless asset and tangency portfolio,choosing the weights of each based on his/her individual risk tolerance.
D)randomly select any efficient portfolio.
E)select a portfolio based solely on his/her desired rate of return while ignoring the associated risks of their selection.

Question

Quizplus · Accepted Answer

The separation principle suggests that investors will combine the riskless asset with the tangency portfolio (market portfolio) to achieve their desired risk-return profile, adjusting the weights based on their risk tolerance.

The Separation Principle States That an Investor Will