The Separation Theorem Says That

question 31

Multiple Choice

The separation theorem says that:

• A) expected return of a portfolio is separate from its variance. Investment decisions can be made separately from consumption decisions.
• B) lending decisions can be made jointly with borrowing decisions.
• C) systematic risk and unsystematic risk should be considered separately.
• D) variance of a portfolio is separate from its covariance.

---

Definitions:

Cost Method

An accounting method used to value an investment at its original purchase cost, adjusted for dividends, stock splits, and stock dividends.

Intercompany Interest Revenues

Income earned by one entity within a corporate group for lending funds to another entity within the same group, typically eliminated during the consolidation process for financial reporting.

Interest Expense

The cost incurred by an entity for borrowed funds, including loans, bonds, or lines of credit.

Bond Premium

Bond Premium is the difference by which the price paid for a bond exceeds its face value, typically occurring when the bond's interest rate is higher than the current market rate.