What is the '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.
BREAKING DOWN '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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What is Fisher's separation theorem?
Fisher's separation theorem stipulates that the goal of any firm is to increase its value to the fullest extent, regardless ... Read Answer >> 
How is portfolio variance reduced in Modern Portfolio Theory?
Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ... Read Answer >> 
How do I calculate the percentage gain or loss for my portfolio when all of the stocks ...
Finding the total percentage gain or loss on a portfolio requires a few simple calculations. First, you should understand ... Read Answer >> 
Can mutual funds invest in hedge funds?
Learn about mutual fund portfolio management techniques and mutual funds' ability to invest in hedge funds, as well as new ... Read Answer >> 
Why is risk return tradeoff important in designing a portfolio?
Learn how the risk return tradeoff is used in the construction of portfolios, and how modern portfolio theory seeks to diversify ... Read Answer >> 
Why would a person choose a mutual fund over an individual stock?
There are a number of reasons why an individual may choose to buy mutual funds instead of individual stocks. The most common ... Read Answer >>