What is the first step an investor takes when making an investment decision according to the separation principle?
A)Determine the mix of risky and risk-free assets he/she will hold
B)Quantify the amount of risk he/she is willing to accept
C)Estimate future inflation and risk-free rates
D)Determine the portfolio of risky assets that he/she will hold
E)Specify a desired rate of return

Question

Quizplus · Accepted Answer

The separation principle suggests that the first step an investor should take is to determine the portfolio of risky assets that he/she will hold. This principle divides the investment decision process into two stages: selecting the best combination of risky assets (regardless of the investor's risk preference) and then mixing this with the risk-free asset based on the investor's risk tolerance.

What Is the First Step an Investor Takes When Making