The Separation Principle States That an Investor Will

question 37

Multiple Choice

The separation principle states that an investor will:

• A) choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return.
• B) choose an efficient portfolio based on individual risk tolerance or utility.
• C) never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time.
• D) invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance.

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Definitions:

Cash Reserves

Funds that a person or entity keeps on hand to meet short-term and emergency funding needs.

Medium of Exchange

An instrument or system used to facilitate the sale, purchase, or trade of goods and services between parties.

Currency

A medium of exchange that facilitates trade and is usually issued by a government as legal tender.

Nonbanking Public

The segment of the economy that does not include banks or financial institutions, generally referring to average consumers and businesses.