In the field of economics and finance, modern portfolio theory sets out to either minimize risk for a given level of expected return or to maximize returns for a given level of risk. Several theories exist under the umbrella of modern portfolio theory, including the mutual fund separation theorem. Often referred to simply as the separation theorem, the mutual fund separation theorem argues that holding a certain combination of mutual funds in the proper ratios can produce an optimal portfolio for any investor.
For the mutual fund separation theorem to hold true, the number of mutual funds in a portfolio must not exceed the number of individual assets. Mutual fund separation offers several advantages to investors, including the potential to derive and test the functioning of various asset markets. Additionally, an investor can often buy a small number of mutual funds at a much lower price than a large collection of individual assets.
For the mutual fund separation theorem to hold true, the number of mutual funds in a portfolio must not exceed the number of individual assets. Mutual fund separation offers several advantages to investors, including the potential to derive and test the functioning of various asset markets. Additionally, an investor can often buy a small number of mutual funds at a much lower price than a large collection of individual assets.