- 1 Marks
Question
Separating the risk and return characteristics of market investments from the individual investment decisions is known as (the):
A. Risk transformation
B. Separation Theorem
C. Financial intermediation
D. Maturity transformation
E. Amortisation
Answer
B. Separation Theorem
Explanation:
The Separation Theorem states that an investor’s decision can be separated into two independent steps: first, determining the optimal risky portfolio based on risk and return, and second, choosing the combination of the risk-free asset and the risky portfolio according to individual preferences for risk. This principle separates the characteristics of the investments from the individual decisions of the investors.
- Tags: Financial Theory, Investment decisions, Separation Theorem
- Level: Level 1
- Topic: Basics of Business Finance and Financial Markets
- Series: MAY 2023
- Uploader: Theophilus