Harry Markowitz

The Separation Theorem

Harry Markowitz

James Tobin

Nobel Prize in Economics, 1981

James Tobin

Harry Markowitz was primarily concerned with the diversification of risky assets. James Tobin added the concept of combining risk-free assets, such as cash or bonds, with risky assets, such as stocks. His paper, "Liquidity Preference as Behavior Toward Risk" appeared in The Review of Economic Studies in February 1958. The concept he described is known as the Separation Theorem, because it separates Markowitz's approach from the completely different decision of dividing up the whole portfolio between risky and risk-free assets. Note that very low risk assets such as high quality and short duration bonds can be considered a reasonable substitute for risk-free assets when constructing portfolios. 

Tobin also performed an analysis of financial markets and their relationship to expenditure decisions, debt decisions, employment, production, and prices. The quantity known as "Tobin’s q" is the ratio between the market value and the replacement value of the same asset.