DEFINITION of 'Mutual Fund Theorem'
An investing theory, postulated by Nobel laureate James Tobin, that states that all investors should hold an identically comprised portfolio of "risky assets" combined with some percentage of riskfree assets or cash. A conservative investor would hold a higher percentage of cash, but would have the same basket of risky investments in his or her portfolio as an aggressive investor.
INVESTOPEDIA EXPLAINS 'Mutual Fund Theorem'
The mutual fund theorem came about as a result of the meanvariance framework laid out by Harry Markowitz and his theories on how diversification limits portfolio risk. The viability of the mutual fund theorem has been questioned because several important assumptions must be in place for the theorem to be proved. These include a lack of transaction costs and perfectly transparent markets.
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Portfolio
A grouping of financial assets such as stocks, bonds and cash ... 
Diversification
A risk management technique that mixes a wide variety of investments ... 
Asset Allocation
An investment strategy that aims to balance risk and reward by ... 
Modern Portfolio Theory  MPT
A theory on how riskaverse investors can construct portfolios ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Portfolio Management
The art and science of making decisions about investment mix ...

Investing Basics
Achieving Optimal Asset Allocation
Minimizing risk while maximizing return is any investor's prime goal. The right mix of securities is the key to achieving your optimal asset allocation. 
Mutual Funds & ETFs
Major Blunders In Portfolio Construction
Do you have the best mix of investments? Find out how to make sure. 
Active Trading
Modern Portfolio Theory: Why It's Still Hip
See why investors today still follow this old set of principles that reduce risk and increase returns through diversification. 
Professionals
How do companies measure labor supply in human resources planning?
Find out how and why a company's human resources department would measure labor supply, and what policies would address a shortage or surplus. 
Fundamental Analysis
Why are OTC (overthecounter) transactions controversial?
Learn more about overthecounter transactions, and why OTC traders are considered riskier than traders working with larger market exchanges. 
Fundamental Analysis
What is the difference between cost of equity and cost of capital?
Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required returns on raised capital. 
Fundamental Analysis
What is arbitrage pricing theory?
Find out what arbitrage pricing theory is and how it can theoretically be used by investors to generate riskfree profit opportunities. 
Fundamental Analysis
What does a high weighted average cost of capital (WACC) signify?
Find out what it means for a company to have a relatively high weighted average cost of capital, or WACC, and why this is important to lenders and investors. 
Fundamental Analysis
How do economists and psychologists calculate diminishing marginal utility differently?
Find out why disagreements about the validity of the law of diminishing marginal utility usually boil down to arguments about definitions. 
Fundamental Analysis
What does the law of diminishing marginal utility explain?
Learn about some of the important economic insights that can be derived from applications of the law of diminishing marginal utility.