portfolio separation theorem


Observation that the construction of a diversified portfolio of risk-free investments and those with varying degree of risk is unaffected by the investor's personal preferences. That is, an investor makes choices on the basis of the net present value of the projected returns and not on his or her level of risk tolerance. Since this behavior separates the decision about the type of investments from the decision about the acceptable level of risk, it is named portfolio separation theorem. Its implication is that a company's choice of debt-equity ratio is inconsequential.
Also called Fisher's Separation Theory after its proposer, the U.S. economist Irving Fisher (1876-1947).

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You should try and see if there is a way to make the portfolio separation theorem work in your best interests.

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If you want to get the most from your money you should try and use the portfolio separation theorem to your advantage.

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The portfolio separation theorem ensured that favorable results would be expected to occur despite the unique preferences of the client.

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