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Chapter 2: Q.19 (page 97)

How can the provision of several types of financial services by one firm be both beneficial and problematic?

Short Answer

Expert verified

Managing a diverse portfolio would cause the organization a slew of issues and disruptions.

Step by step solution

01

Step 1. Introduction

The term "financial services" refers to a wide range of activities including banking, investing, and insurance. Financial services are the activity of financial services firms and their personnel, whereas financial goods are the items, accounts, or investments that they provide.

02

Step 2. Explanation

Credit card firms, insurance companies, investment funds, banks, accountants, consumer financing companies, stock trading companies, and so on are all examples of financial services. Providing a variety of financial services is advantageous since it allows them to cater to different groups and segments of customers based on their interests and tastes. Customers will have a wide range of alternatives, and they will anticipate having everything served under one roof.

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Most popular questions from this chapter

Give at least three examples of a situation in which financial markets allow consumers to better time their purchases.

Some economists suspect that one of the reasons economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense?

If you are an employer, what kinds of moral hazard problems might you worry about with regard to your employees?

Suppose you have just inherited \(10,400 and are considering the following options for investing the money to maximize your return:

Option 1: Put the money in an interest-bearing checking account that earns 3%. The FDIC insures the account against bank failure.

Option 2: Invest the money in a corporate bond with a stated return of 6%, although there is a 10% chance the company could go bankrupt.

Option 3: Loan the money to one of your friend’s roommates, Ayesha, at an agreed-upon interest rate of 7%, but you believe there is a 7% chance that she will leave town without repaying you.

Option 4: Hold the money in cash and earn zero return.

a. If you are risk-neutral (that is, neither seek out nor shy away from risk), which of the four options should you choose to maximize your expected return? (Hint: To calculate the expected return of an outcome, multiply the probability that an event will occur by the outcome of that event and then add them up.)

b. Assume that Option 3 and Option 4 are your only choices. If you could pay your friend \)50 to find out extra information about Ayesha that would indicate with certainty whether she will leave town without paying, would you pay the $50? What does this say about the value of better information regarding risk?

Go to the St. Louis Federal Reserve FRED database, and find data on federal debt held by the Federal Reserve (FDHBFRBN), by private investors (FDHBPIN), and by international and foreign investors (FDHBFIN). Using these series, calculate the total amount held and the percentage held in each of the three categories for the most recent quarter available. Repeat for the first quarter of 2000, and compare the results.
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