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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

鈥淚n a world without information costs and transaction costs, financial intermediaries would not exist.鈥� Is this statement true, false, or uncertain? Explain your answer.

In 2008, as a financial crisis began to unfold in the United States, the FDIC raised the limit on insured losses to bank depositors from \(100,000 per account to \)250,000 per account. How would this help stabilize the financial system?

A significant number of European banks held large amounts of assets as mortgage-backed securities derived from the U.S. housing market, which crashed after 2006. How does this demonstrate both a benefit and a cost to the internationalization of financial markets?

One of the single best sources of information about financial institutions is the U.S. Flow of Funds report, produced by the Federal Reserve. This document contains data on most financial intermediaries. Go to http:// www.federalreserve.gov/releases/Z1/ and find the most current release. You may have to get Acrobat Reader if your computer does not already have it; the site has a link for a free download. Go to the Level Tables and answer the following questions.

a. What percentage of assets do commercial banks hold in loans? What percentage of assets is held in mortgage loans?

b. What percentage of assets do savings and loans hold in mortgage loans?

c. What percentage of assets do credit unions hold in mortgage loans and in consumer loans?

Suppose that Toyota sells yen-denominated bonds in Tokyo. Is this debt instrument considered a Eurobond? How would your answer change if the bond were sold in New York?
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