Question

define

. Free-rider problem

Principal-agent problem

Diversification

Credit Crunch

Liquidity mismatch

Answer 1

Free-rider problem
It is a market failure that occurs when people take advantage of being able to use a common resource, or collective good, without paying for it, as is the case when citizens of a country utilize public goods without paying their fair share in taxes.

Principal-agent problem

The principle agent problem arises when one party (agent) agrees to work in favor of another party (principle) in return for some incentives. Such an agreement may incur huge costs for the agent, thereby leading to the problems of moral hazard and conflict of interest. Owing to the costs incurred, the agent might begin to pursue his own agenda and ignore the best interest of the principle, thereby causing the principal agent problem to occur.

Diversification

Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Credit Crunch

A credit crunch is an economic condition in which investment capital is hard to secure. Banks and investors become wary of lending funds to individuals and corporations, which drives up the price of debt products for borrowers.

Liquidity mismatch

Occurs when a business mismatchesits balance sheet by having more short term liabilities than it has short term assets, as well as possessing more assets than it has liabilities for medium and long term obligations.

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