The purpose of diversification is to ________________.
A. raise the volatility of a portfolio’s return
B. reduce the volatility of a portfolio’s return
C. reduce the average return on a portfolio
D. raise the average return on a portfolio
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An investor who puts all the funds into one asset _____________her portfolio’s ____________.
A. increases; diversification
B. increases; average return
C. decreases; diversification
D. decreases; average return
Successful financial intermediaries have higher earnings from their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to ______________.
A. moral hazard
B. adverse selection
C. bad luck
D. financial panic
Financial institutions________________.
A. exist because there are substantial information and transaction costs in the economy.
B. help reduce the exposure of investors to risk
C. are involved in the process of indirect finance
D. do all of the above
When the lender and the borrower have different amounts of information regarding a transaction, ____________is said to exist.
A. adverse selection
B. asymmetric information
C. moral hazard
D. fraud
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