Capital Markets and Risk Sharing

Another form of risk sharing takes place in the capital markets because the financial ownership of ph),sisal capital can be spread among many owners through the vehicle of corporate ownership. Take the example of investment to develop a new commercial aircraft. A completely new design” including research and development, might require $2 billion of investment spread over 10 years. Yet there is no guarantee that the plane will find a large- , enough commercial market to repay the invested funds. Few people have the wealth or inclination to • undertake’ such a risky venture. , Market economies accomplish this task through publicly owned corporations. A company like Boeing is owned by millions of people. none of whom owns a ‘major portion 6f the shares. In a hypothetical case. divide Boeing’s ownership equally anons- 10 million individuals. Then the $2 billion investment becomes $200 per person.

which is a risk that many would be willing to bear if the returns on Boeing stock appear attractive. The principle of risk spreading extends into the international dimension as well. The risks of large scale investment and production are shared with investors from Japan. Britain, Germany, and other countries when they buy shares of American corporations And, just as an insurance company reduces its risks by insuring houses in different cities, so investors can reduce the riskiness of their portfolios by holding shares in companies operating around the world. One of the most exciting and rapidly growing areas of economics is financial economics.

This topic examines how investors can allocate their funds to maximize return for a given level of risk and how the prices of stocks and other financial assets behave. financial markets have brought economics into the home and dormitory for millions of people who invest’ online, save for a college education, or manage their pension funds. Some even think that stock . speculation is a benign form of gambling with a low house take. Financial economics is ‘covered in depth in the macroeconomics chapters of this text. B)’ spreading the ownership of risky investments among a multitude of owners, capital markets can spread risks and encourage much ‘larger investments and risks than would be tolerable for individual owners.

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