Financial intermediaries (banks in particular)have the ability to avoid the free-rider problem as long as they primarily
A) make private loans.
B) acquire a diversified portfolio of stocks.
C) buy junk bonds.
D) do a balanced combination of A and B of the above.

Question

Quizplus · Accepted Answer

Financial intermediaries can avoid the free-rider problem by primarily making private loans. In the case of private loans, the bank can have direct communication and contract with the borrower, ensuring that they will receive a return on their investment. The free-rider problem exists when investors can benefit from the investment without contributing anything to it. When banks acquire a diversified portfolio of stocks or buy junk bonds, they are exposed to the risk of not being able to recover their investment and are more vulnerable to the free-rider problem.

Financial Intermediaries (Banks in Particular)have the Ability to Avoid the Free-Rider