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

question 23

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)because FIs have a cost advantage in monitoring their portfolios.
• E)All of the options.

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Definitions:

Athletic Incompetence

A perceived or actual lack of skill in physical sports activities.

Pessimistic Attributional Style

A tendency to habitually attribute negative events to stable, global, and internal causes, potentially leading to depressive symptoms.

Intellectual

Relating to the intellect; involving deep cognitive thinking skills, understanding, and reasoning.

Unrealistic Optimism

The belief that positive outcomes will happen, often ignoring the realistic likelihood of adverse events.