Mutual fund theorem

A result associated with the CAPM, asserting that investors will choose to invest their entire risky portfolio in a market-index or mutual fund.

Mutual Fund Theorem

A theory stating that all investors ought to place all their risk capital into a mutual fund containing the exact same securities. They then ought to place the remainder of their investments in risk-free securities. The theory recommends a single mutual fund because Markowitz portfolio theory states that there is precisely one portfolio with the maximum return for each level of risk. The mutual fund theorem purports to maximize the return for all capital that an investor puts at risk. It was first suggested by James Tobin.

References in periodicals archive ?

One of the most famous results in mean-variance analysis is James Tobin's mutual fund theorem of portfolio choice, according to which all investors should combine cash with a single portfolio or "mutual fund" of risky assets.

The mutual fund theorem directs all investors, conservative or aggressive, to hold the same portfolio of stocks and bonds, mixing the portfolio with more or less cash depending on the investor's aversion to risk.

Strategic Asset Allocation: Portfolio Choice for Long-Term Investors

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