The Separation Theorem and "Bonds are not Cash"

Every baby knows that if asset returns preferences are determined by the one period means and covariances then the famous separation theorem tells us:

Note that bonds are risky assets too, so theory's "rational investor" has a pretty monstrous bond position compared to what investment advisors typically advocate for "young investors."

There is a nice paper that discusses some of the nuances of this situation. In particular, it observes that if human capital is taken into account, then one has some movement in the direction of the traditional advice that has one hold more bonds as one ages (and human capital erodes).

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Note: "Every baby knows" is a phrase that was often used by Paul Erdos just before introducing some archaine fact, say about gaps between primes.