In Economics, What Is the Separation Theorem?

The separation theorem is an economic theory that a company's investment decision can be separated from the investor's personal preferences. The company's goal is to maximize value, independent of the owner's preferences. Therefore, managers 'investment decisions should be separated from investors' market opportunities. Due to the existence of financial markets, individuals can adjust cash inflows, consumption preferences and consumption timing. Therefore, the value of an investment is not affected by personal consumption preferences, that is, all investors will follow the principle of value maximization for the same project Perform assessments and decide on trade-offs, although their consumer preferences vary. The theory was put forward by American economist Fisher, and its specific expression can be found in his book "Theory of Interest". ^[1]

The separation theorem refers to

Separation theorem is very important in financial management, it shows that the management of the company does not have to consider every

Regardless of the investor's personal preferences, all investors want to use

Separation Theorem: If the non-empty sets S and F are

On the effective portfolio boundary of all risky portfolios, any two separate points represent two separate effective portfolios, and the effective portfolio represented by any other point on the effective portfolio boundary can be represented by these two The linear portfolio representation of the effective portfolio represented by the separated points. ^[4]

In simple terms, an investor's optimal risk asset portfolio is independent of the investor's preference for risk and return.

Core: Under equilibrium conditions, as long as each investor invests in risk assets, he must hold a combination of cut points;

If the structure of the tangent point combination is known, the work of the investment portfolio under equilibrium conditions is greatly simplified, and investors only need to appropriately allocate funds and combine risk-free assets and tangent points to achieve the best investment.