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Chapter 2: Q. 10 (page 97)

How does risk sharing benefit both financial intermediaries and private investors?

Short Answer

Expert verified

The private investors and intermediaries are likely to invest in more diversified way.

Step by step solution

01

Step 1. Introduction

A financial intermediary, such as a commercial bank, investment bank, mutual fund, or pension fund, acts as a go-between for two parties in a financial transaction.

02

Step 2. Explanation

Private investors can decrease their dangers through risk-sharing and diversification of portfolios. It reduces the risk exposure and they can invest in a more diverse portfolio that consists of both high-risk as well as low-risk assets.

Through risk-sharing financial intermediaries can spread the returns they earn on high-risk assets and return from low-risk assets. they can carry risks at a low transaction cost and earn from a diversified portfolio of assets.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on federal debt held by the Federal Reserve (FDHBFRBN), by private investors (FDHBPIN), and by international and foreign investors (FDHBFIN). Using these series, calculate the total amount held and the percentage held in each of the three categories for the most recent quarter available. Repeat for the first quarter of 2000, and compare the results.

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