Portfolio Separation Theorem

Portfolio Separation Theorem - This is the term used to describe the practice of separating the decision about the type of stock to invest in, from the decision about the acceptable level of risk. The personal preferences of an investor will not affect the overall risks involved in diversified portfolio. The investor makes his decision based on the present value of the projected returns. This behavior allows investors the freedom to include a company in their portfolio regardless of that company's choice of debt to equity ratio, and allows the clients the benefit of the improved potential for profit. It is sometimes referred to as the Fisher's theory after its founder, Irving Fisher