Financial intermediaries reduce individual risk because they pool the funds of savers.

Question

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Financial intermediaries such as banks, mutual funds, and insurance companies pool the funds of savers to invest in a diversified portfolio of assets. This reduces the risk for individual savers because their funds are not concentrated in one asset or investment. Instead, they are spread out across multiple investments, which can help mitigate the impact of any losses on one particular investment. Additionally, financial intermediaries may also provide insurance or other risk management services to further reduce individual risk.

Financial Intermediaries Reduce Individual Risk Because They Pool the Funds