Question

Financial intermediaries exist because small investors cannot efficiently _______.

Answer 1

Answer:

C) Diversify their portfolios, assess credit risk of borrowers, or advertise for needed investments

Explanation:

A financial intermediary is the middleman that brings together a person (or business) with excess money and a person (or business) that needs money, e.g. commercial and investment banks, mutual funds.

Imagine that you work a lot and were able to save $100,000. If no financial intermediaries would exist, what would you do with your money?

• Hide it somewhere in your house or under an X in a treasure island.
• Search for someone that needs money and is willing to pay interest for it. But how do you know that he/she will pay you back?
• Spend it all on a new car and a trip to Europe.

Instead, since financial intermediaries exist, we can just deposit our money in a bank or invest it in stocks. It is much simpler this way.

Now imagine that you are the on the other side and you need money to buy a car or a house. What can you do?

• Ask your parents or another relative to give you the money.
• Go looking for someone that is willing to trust you and lend you money and hopefully he wouldn't break any of your bones if you pay on time.

But since banks exist, we can go and get a mortgage or a auto loan.

Now all this mess multiplied by millions of people and businesses and trillions of dollars is really a nightmare. No one likes banks. I doubt even their employees like them, but we need them.

Answer 2

Answer:

The correct option is C,small investors cannot efficiently diversify their portfolios, assess credit risk of borrowers, or advertise for needed investments.

Explanation:

Financial intermediaries are those institutions that link the surplus side,those with cash surplus to requirement and the deficit side,those that are short of the required amount of cash for investment purposes.

Financial intermediaries as experts in the field have the requisite knowledge of the market,skills and experience to diversify portfolio.

Diversification involves ascertaining the various instruments the funds available be invested in and the proportion to invest in each .

It is also noteworthy to determine the credit risk of the borrowers to ascertain how risky the investment is and the appropriate level of return.

Finally,the intermediaries advertise the needed investments,for instance an Initial Public Offer could be advertised by prospectus.