The separation theorem states that: Group of answer choices systematic risk is separate from unsystematic risk. the investment decision is separate from the financing decision. borrowing portfolio is separate from the lending portfolio. individual security risk is separate from portfolio risk.

Question

Kellen Hicks

Business

26 January, 16:28

The separation theorem states that: Group of answer choices systematic risk is separate from unsystematic risk. the investment decision is separate from the financing decision. borrowing portfolio is separate from the lending portfolio. individual security risk is separate from portfolio risk.

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Answers (1)

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Mayra Flowers · Answer 1

The investment decision is separate from the financing decision

Explanation:

Irving Fisher contributed to the separation theorem, as per which, the capital structure of a firm and it's dividend decisions do not affect the value of the firm.

Fisher laid emphasis upon long term prosperity of a firm and thus was of the opinion that shareholder's wishes should not be assigned much importance and rather the firm should work towards long term profitability for maximizing it's (firm's) value.

Thus, when deciding upon investment alternatives, a firm should not take shareholder's wishes under consideration and such investment decisions should be based upon long term prosperity, which in itself would take care of both shareholders and management.

As per Fisher, there exists a distinction between a firm's investment decisions and financing decisions and thus while investing in projects, a firm should make the most of productive opportunities, which shall serve long term objectives.