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Topic: Business
Number of pages / Number of words: 6 / 1552
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in a 1958 paper said if you hold risky securities and are able to borrow - buying stocks on margin - or lend - buying risk-free assets - and you do so at the same rate, then the efficient frontier is a single portfolio of risky securities plus borrowing and lending....

Tobin's Separation Theorem says you can separate the problem into first finding that optimal combination of risky securities and then deciding whether to lend or borrow, depending on your attitude toward risk...


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It then showed that if there's only one portfolio plus borrowing and lending, it's got to be the market" (Moneychimp, 2005). The following diagram illustrates the theorem:

"As usual you're trying to build an optimal portfolio for your risk tolerance; and as before, it will lie somewhere on the straight line joining the cash rate Rf to some optimal mix on the efficient frontier...


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