Final answer:
Tobin's separation property implies that portfolio creation can be divided into determining the optimal mix of risky assets and deciding the proportion of that risky portfolio versus risk-free assets based on individual risk tolerance.
Step-by-step explanation:
According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of determining the optimal mix of risky assets and choosing the appropriate combination of the risky asset portfolio with a risk-free asset.
In the first step, investors use their beliefs about the risks and returns of various assets to determine the proportions of each risky asset in the portfolio, often by trying to maximize expected return for a given level of risk, as per the Efficient Frontier Theory.
The second step involves deciding the total amount to invest in this optimal risky portfolio versus how much to invest in risk-free assets like Treasury bills, which is influenced by the individual's risk tolerance.