The Reason FIs Can Offer Highly Liquid, Low Price-Risk Contracts

question 31

Multiple Choice

The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is:

• A)because diversification allows an FI to predict more accurately the expected returns on its asset portfolio
• B)significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive
• C)because individual savers cannot benefit from risk diversification
• D)All of the listed options are correct.

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Definitions:

Premium

An amount paid that is above the standard price or rate for an enhanced feature, service, or higher priority.

Insurance Companies

Financial institutions that provide coverage against specific losses in exchange for premiums.

Signaling

Taking some action to establish credibility despite possessing private information; a way to reduce adverse selection.

Reputation

The widespread belief about the character, qualities, and behaviors of an entity or individual, which can influence economic transactions and relationships.