• 1 Marks

BMF – Nov 2021 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Question on separating risk and return characteristics from individual investment decisions.

Separating the risk and return characteristics of market investments from the individual investment decisions is known as:

A. Risk transformation
B. Separation theorem
C. Financial intermediation
D. Maturity transformation
E. Amortisation

B. Separation theorem

Explanation:
The correct answer is B because the separation theorem refers to the concept in finance where investors can separate their investment decisions into two stages: first, choosing the optimal portfolio of risky assets, and second, deciding on a personal risk preference by adjusting their mix between the risky portfolio and a risk-free asset.

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