Monetary Economics Homework 1

Monetary Economics Homework 1 - Dustin Johnston Monetary...

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Dustin Johnston Monetary Economics Homework 1 1. a. By definition a mutual fund is nothing more than a pooling of money from several different investors for the purpose of investing in one or more stocks, bonds or other securities that is selected by the mutual fund manager who is educated in market trends and the financial markets in general. By pooling money from several different investors mutual funds first divide the amount of risk placed on one single investor by splitting the degree of risk over the total number of investors. The second way risk is reduced in a mutual fund is the majority of mutual funds invest in more than one stock which moves the investor’s money from one single stock which may have very little to a large amount of risk, to hundreds of stocks thus placing ones faith in the stock market rather than a specific stock. Furthermore, by investing in multiple mutual funds an investor may further reduce his risk by removing the power of the individual mutual fund manager. b. When a saver deposits funds into a bank, that specific bank guarantee’s the saver’s investment, the same is true when a borrower acquires loans from a bank. A bank can do this for several reasons. First because a bank is much like a mutual fund and can balance its
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Monetary Economics Homework 1 - Dustin Johnston Monetary...

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