The separation property refers to the conclusion that
A) the determination of the best risky portfolio is objective, and the choice of the best complete portfolio is subjective.
B) the choice of the best complete portfolio is objective, and the determination of the best risky portfolio is objective.
C) the choice of inputs to be used to determine the efficient frontier is objective, and the choice of the best CAL is subjective.
D) the determination of the best CAL is objective, and the choice of the inputs to be used to determine the efficient frontier is subjective.
E) investors are separate beings and will, therefore, have different preferences regarding the risk-return tradeoff.

Question

Quizplus · Accepted Answer

The separation property, as described in modern portfolio theory, indicates that the process of selecting the optimal mix of risky assets (to form the best risky portfolio) is based on objective criteria (market data, expected returns, variances, and covariances). In contrast, the choice of the best complete portfolio, which involves combining the risky portfolio with a risk-free asset, is subjective and depends on the individual investor's risk tolerance.

The Separation Property Refers to the Conclusion That