According to the separation theorem,
A) the efficient set with borrowing and lending is an arc.
B) investors' indifference curves are linear.
C) all investors have the same one-period time horizon.
D) only one portfolio of risky assets is optimal for every investor when used in combination with risk-free borrowing and lending.

Question

Quizplus · Accepted Answer

The separation theorem, also known as the mutual fund theorem, posits that within the context of the Capital Asset Pricing Model (CAPM), all investors will choose a combination of the risk-free asset and the market portfolio, which is the optimal portfolio of risky assets. This means that only one portfolio of risky assets is considered optimal for every investor when it is combined with risk-free borrowing and lending, allowing investors to adjust their overall portfolio risk and return to their individual preferences.

According to the Separation Theorem