​Deviation from market portfolio, a point on the Capital Market Line (CML) that differentiates investors' investing and financing decisions (based on their risk appetite) is described by:​

Correct option is B

According to Separation Theorem, the investment decision (i.e., choice of optimal risky portfolio) is independent of the investor's risk preferences. All investors will choose the same optimal portfolio of risky assets (the market portfolio), which lies on the Capital Market Line (CML). Once this portfolio is identified, individual preferences come into play through a financing decision — that is, the investor chooses how much to invest in the risk-free asset vs. the market portfolio, depending on their risk appetite.

• All investors, regardless of their risk tolerance, hold a combination of the risk-free asset and the market portfolio.

• Risk-averse investors lend (invest more in risk-free assets), and risk-seeking investors borrow (leverage the market portfolio).

• The Capital Market Line (CML) shows all possible combinations of the risk-free asset and the market portfolio, giving investors a linear risk-return trade-off.

This separates the task of finding the optimal risky portfolio from the investor’s personal utility preferences, hence the name "Separation Theorem."

Information Booster:

• Developed by James Tobin.

• Demonstrates that portfolio selection has two steps:

  1. Identify the optimal market portfolio (common to all investors).

  2. Choose risk preference-based mix of risk-free and risky assets.

• Applies in the Capital Market Theory where risk-free lending and borrowing are assumed.

• Provides theoretical justification for mutual fund separation, i.e., that investors can achieve desired risk-return profiles with just two funds: one risk-free and one market portfolio.

• Forms a core part of CAPM (Capital Asset Pricing Model)framework.

Additional Knowledge:

(a) Convergence theorem

• Not directly relevant in capital market theory or portfolio selection.

• Often appears in statistical or numerical methods (e.g., convergence in algorithms).

• Does not explain investor behavior or portfolio selection based on risk-return trade-offs.

(c) Efficient market theorem (Efficient Market Hypothesis – EMH)

• Suggests that security prices fully reflect all available information, meaning no investor can consistently beat the market.

• It deals with information efficiency, not portfolio composition or separation based on risk preferences.

(d) Arbitrage pricing theorem (APT)

• Describes asset pricing based on multiple macroeconomic factors, not just market risk.

• APT is an alternative to CAPM but doesn’t involve the CML or risk preference-based separation.

• Focuses on arbitrage opportunities and factor loadings, not investment-financing decisions of investors.