Question

How does risk sharing benefit both financial intermediaries and private investors?

Short answer

The private investors and intermediaries are likely to invest in more diversified way.

Step-by-step solution

Step 1. Introduction

A financial intermediary, such as a commercial bank, investment bank, mutual fund, or pension fund, acts as a go-between for two parties in a financial transaction.

Step 2. Explanation

Private investors can decrease their dangers through risk-sharing and diversification of portfolios. It reduces the risk exposure and they can invest in a more diverse portfolio that consists of both high-risk as well as low-risk assets.

Through risk-sharing financial intermediaries can spread the returns they earn on high-risk assets and return from low-risk assets. they can carry risks at a low transaction cost and earn from a diversified portfolio of assets.