I am reminded of the American Jew who said during the run up to 1948 'when ever I here of a British death[in Palestine] I have a song in my heart.' The British are accused of anti-semitism because they protested about Jewish terrorists killing British civilians and troops in Palestine, how unreasonable. The much quoted Balfour Declaration supported the 'establishment of a Jewish homeland' in Palestine. However the second sentence of the Declaration said 'provided the rights and possessions of the indigenous population are not infringed'. The pro-Israeli lobby are diligent in ensuring every-one forgets that one. Israel will have no peace or security until there is justice for the Palestinians i.e a viable contiguous state with East Jerusalem as its capital.
With all due respect, I fail to see how your formula is fair or just. Jerusalem has almost always been a majority Jewish city, except for the period between 1948 and 1967 when Jordan kicked all the Jews out of the city. It is now currently also a Jewish city. There is no justice in asking these citizens to move, to renounce their citizenship, or to travel through checkpoints/borders just to leave Jerusalem.
I also fail to see how occupation is the source of the fighting. It is not. The fighting had been going on long before Israel was even created. Resultion 181 should have been considered as fair back in 1948, as it did respect the indiginous population by creating for them a state of their own. It was rejected by the leaders who would not compromise or accept the fact that the partition that became Israel was majority Jewish populated at that time.
To have justice, the Arab states will have to accept resolution 181. All subsequent violence is the result of their initial rejection of the first UN resolution. You simply cannot reverse cause and effect and expect to come up with a just solution. First things first, and the first thing is the acceptance of a Jewish state right where it sits, now.