Conditions That Likely Contributed to a Credit Crunch in 2008

question 57

Multiple Choice

Conditions that likely contributed to a credit crunch in 2008 include:

• A)capital shortfalls caused in part by falling real estate prices.
• B)regulated hikes in bank capital requirements.
• C)falling interest rates that raised interest rate risk,causing banks to choose to hold more capital.
• D)increases in reserve requirements.

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Definitions:

Diversify

Diversify refers to the strategy of spreading investments across various financial instruments, industries, and other categories to reduce exposure to risk.

Efficient Frontier

In portfolio theory, it represents the set of optimal portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return.

Risky Assets

Investments with a high degree of uncertainty in their returns, usually implying a greater potential reward.

Investment Opportunity Set

The array of all possible investment combinations available to an investor considering both risk and return.