A common method for banks to reduce their credit risk is to
A) specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness.
B) specialize in loans to companies whose earnings patterns are quite similar over time.
C) A and B
D) none of the above

Question

Quizplus · Accepted Answer

Specializing in loans to just one or a few industries or to companies with similar earnings patterns can increase risk due to lack of diversification. Banks typically reduce credit risk by diversifying their loan portfolios across different industries and companies with varying earnings patterns.

A Common Method for Banks to Reduce Their Credit Risk