A Key Finding of the Economic Analysis of Financial Structure

question 34

Multiple Choice

A key finding of the economic analysis of financial structure is that

• A)the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses.
• B)while free-rider problems limit the extent to which securities markets finance some business activities,nevertheless the majority of funds going to businesses are channeled through securities markets.
• C)given the great extent to which securities markets are regulated,free-rider problems are not of significant economic consequence in these markets.
• D)economists do not have a very good explanation for why securities markets are so heavily regulated.

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Definitions:

Single Factor Model

A financial model that describes an asset's returns as dependent on a single market index or factor.

Fama-French Three Factor Model

The Fama-French Three Factor Model expands on the Capital Asset Pricing Model by incorporating three factors: market risk, size risk, and value risk, to explain stock returns.

Risk Premiums

The extra return expected by investors for holding a risky asset compared to a risk-free asset, as compensation for the additional risk.

Expected Return

The anticipated profit or loss from an investment, taking into account the potential outcomes and their probabilities.