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ECS3701 ASSIGNMENT 2 (SEM 2) 2022
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ECS3701 ASSIGNMENT 02 S2 2022ECS3701
ASSIGNMENT: 02
Year: 2022
DOCUMENT PREVIEW:
2.01 If you were a private investor, would you and/or financial intermediaries benefit from risk-
sharing? Explain which party will benefit and why.
Risk sharing defined as sharing with another party the burden of loss or the benefit of gain, from
a risk, and the measures to reduce a risk.
Financial intermediaries can help reduce the exposure of investors to risk through the process of
risk sharing. Low transaction costs allow financial intermediaries to share risk at low cost.
Risk sharing benefits financial intermediaries because they gain on the spread between the
returns they earn on risky assets and the payments they make on the assets they have sold.
Financial intermediaries promote risk sharing by helping individuals to diversify and thereby lower
the amount of risk to which they are exposed.
Investors benefit because they are able to invest in a diversified portfolio of assets. In keeping
with the “golden rule” do not keep your eggs in one basket. Risk sharing is also referred to as
asset transformation, because, risky assets are turned into safer assets for investors which also
benefits investors.
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