The optimal portfolio of risky assets is exactly the same for every one, no matter what their tolerance for risk-----two-fund separation One interesting consequence of having these two conflicting objectives is that the investor should diversify by purchasing not just one security but several Investors should control the risk of their portfolio not by reallocation among risky assets but through the split between risky free assets Top-down analysis capital allocation decision asset allocation decision security selection decision◼ The optimal portfolio of risky assets is exactly the same for every one, no matter what their tolerance for risk-----two-fund separation ◼ One interesting consequence of having these two conflicting objectives is that the investor should diversify by purchasing not just one security but several. ◼ Investors should control the risk of their portfolio not by reallocation among risky assets, but through the split between risky free assets. ◼ Top-down analysis ◼ capital allocation decision ◼ asset allocation decision ◼ security selection decision