1-60 the Reason FIs Can Offer Highly Liquid,low Price-Risk Contracts

question 78

Multiple Choice

1-60 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 above.

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Definitions:

Retail Stores

Physical or online outlets that sell goods directly to consumers for personal or household consumption.

Behavioral Economist

An economist who studies the effects of psychological, cognitive, emotional, cultural, and social factors on the economic decisions of individuals and institutions.

Individual Decision Making

The process by which an individual selects among alternative choices based on preferences, resources, and information.

Costly Temptations

Expenses incurred from yielding to desires that can lead to negative financial consequences.