2018•World Scientific Book ChaptersRequires access

Optimum Demand and Mutual Fund Theorem

Ser‐Huang Poon

Abstract

This chapter is based on Merton’s (1990) Chapter 5. It is an extension of the previous chapter on “Consumption and Portfolio Selection” to the multi-assets context with a general price process. This chapter is no doubt the most important cornerstone in asset pricing theories. It identifies the optimum portfolios with and without the risk-free interest rate, which is the foundation of the mutual fund and separation theorems, and later become the beta factors models…

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Key concepts: Mutual fund separation theorem, Portfolio, Cornerstone, Mutual fund, Extension (predicate logic), Context (archaeology), Foundation (evidence), Diversification (marketing strategy)