We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is Separation Property?

Malcolm Tatum
Updated: May 16, 2024

Separation property is a theory that is often used to determine the focus and content of an investment portfolio. The theory essentially addresses two key components within the portfolio, and can be applied to any investor’s situation, since these components are considered universal. Proponents of this approach claim that using the separation property model makes it easier to compile a functional portfolio that is likely to help the investor achieve his or her financial goals. By separating the two components and considering each one in turn, it is considered possible to achieve a more balanced portfolio that is capable of producing equitable returns over the long term.

The first component of separation property has to do with assessing the optimal risk inherent in the portfolio. Sometimes referred to as the optimal risky portfolio component, this consideration is focused primarily on the mathematical aspects of the configuration of the portfolio. That is, the mathematical relationship between the investments held in the portfolio is assessed, with a determination made as to whether or not the dynamics of that relationship result in an acceptable degree of risk. For this component, only those investments that carry an appreciable degree of risk are under scrutiny.

Personal choice has a great deal to do with the second component of the separation property model. Unlike the optimal risky portfolio portion, the personal choice is not focused on the overall mathematical efficiency of the investments held by the investor. Instead, the focus is on obtaining the best mix of different types of investments possible, while still keeping the investor’s personal feelings about risk in question. Here, the degree of risk aversion of the individual is taken into consideration, making it possible to buy and sell investments to create the best balance between relatively safe investments and risk-free assets, and those that carry a higher degree of risk. If successful, the portfolio will generate a steady return while not causing the investor any undue concern about assuming too much risk with any one investment.

There are those who promote the theory of separation property as the ideal basis on which to build any type of investment portfolio. Others are not quite as enthusiastic, since it is felt that this approach does not allow much room for the instincts of the individual investor, or that the emphasis on mathematical relationships is either overstated or simply not that important to the overall investment process. In any case, many investors have successfully utilized this basic two-part approach, and found that the efforts did strengthen the integrity of their portfolios, providing them with a greater sense of financial security than they had experienced prior to implementing the process.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.