An advantage FIs have over individual household investors is that they are able to diversify away credit risk by holding a large portfolio of loans to different entities.This reduces

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Diversifying a portfolio means spreading investments across different entities or sectors, which reduces the risk of any one specific entity or sector negatively impacting the overall portfolio. By holding a large portfolio of loans to different entities, FIs can diversify away the risk of any one individual borrower defaulting on their loan, which is firm-specific credit risk. Holding a diversified portfolio does not necessarily reduce systematic credit risk (B), interest rate risk (C), market risk (D), or political risk (E).

An Advantage FIs Have Over Individual Household Investors Is That