In: Finance
Explain what is meant by the Fisher Separation Theorem (FST). Graphically demonstrate FST for the case where an individual ends up lending in financial markets.
Graphically analyse the effect of an increase in the interest rate on the utility of lenders. Discuss whether or not the lenders are better off as a result of the interest rate rise.
Critically evaluate the assumptions upon which the Fisher Separation Theorem is based and assess the extent to which these limit its usefulness in financial decision-making.
In economics, the Fisher separation theorem asserts that the primary objective of a corporation will be the maximization of its present value, regardless of the preferences of its shareholders. The theorem therefore separates management's "productive opportunities" from the entrepreneur's "market opportunities". It was proposed by—and is named after—the economist Irving Fisher.
The theorem has its "clearest and most famous exposition" [1] in the Theory of Interest (1930); particularly in the "second approximation to the theory of interest" (II:VI).
The Fisher separation theorem states that:
Fisher showed the above as follows: