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Experimental Tests of the Separation Theorem and the Capital Asset Pricing Model

American Economic Review 1988 78(3), 500-519
A computer-controlled multistage portfolio selection task was devised to test experimentally basic assumptions underlying the separation theorem and the capital asset pricing model. Although most of the subjects diversified among the three risky assets, the introduction of a riskless asset did not have the effect predicted by the separation theorem, nor were the subjects affected by systematic changes in the variance-covariance matrix of the risky returns. However, performance improved as the reward was increased tenfold.