Which one of these best describes steps of the separation principle?
A)Determine the beta that best fits an investor's risk tolerance level and then determine which assets can be combined to create a portfolio that matches that beta
B)Determine the tangency point between the risk-free rate and the efficient set of risky assets and determine how to combine the tangency point portfolio with risk-free assets to match the investor's risk tolerance level
C)Determine the appropriate beta for an individual investor and then determine the most efficient set of risky assets that falls below that beta level
D)From a pool of assets determine which pairs of assets have the lowest covariances and then determine how to combine these pairs into a portfolio that matches the investor's preferred beta
E)Determine an investor's risk tolerance level and then determine which portfolio rate of return best fits that level of risk tolerance

Question

Quizplus · Accepted Answer

The steps of the separation principle involve determining the tangency point between the risk-free rate and the efficient set of risky assets, and then combining that portfolio with risk-free assets to match the investor's risk tolerance level. This is described in choice B. The other options involve determining a beta level or finding pairs of assets with low covariances, which are not part of the separation principle.

Which One of These Best Describes Steps of the Separation