medium · FRM Part 1 Quantitative Analysis
According to Modern Portfolio Theory (MPT), what is the 'Two-Fund Separation' principle?
- The process of splitting a portfolio's total risk into systematic and unsystematic risk parts.
- All investors hold the same risky market portfolio and adjust risk by mixing it with the risk-free asset.
- Investors must hold at least two different, uncorrelated asset classes to be considered properly diversified.
- A governance requirement mandating separation of front-office trading desks from back-office risk management functions.
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