7-84 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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Holding a large portfolio of loans to different entities allows FIs to diversify away firm-specific credit risk, which is the risk associated with a particular borrower or issuer. This does not necessarily reduce systematic credit risk (which refers to macroeconomic factors that affect the creditworthiness of many borrowers simultaneously) or other types of risk such as interest rate risk, market risk, or political risk.

7-84 an Advantage FIs Have Over Individual Household Investors Is