Question

Using the diagram of the risk-return curve and the capital market line, explain how having a banking system in the economy improves investment opportunities.

 

 

Answer 1

 

Portfolios that blend risk and return in the best possible way are shown by the capital market line (CML). It is a theoretical idea that depicts all possible portfolio combinations between the market's hazardous asset portfolio and the risk-free rate of return. According to the capital asset pricing model (CAPM), all investors will decide on a position on the capital market line in equilibrium by borrowing or lending at the risk-free rate since this optimises return for a particular degree of risk. The transmission of monetary policy, one of the government's most crucial instruments for attaining economic growth without inflation, is a crucial function of banks as well. Banks enable the movement of money in the marketplaces where they operate, whereas the central bank regulates the money supply at the national level. As the main source of credit, it provides funding for individuals to purchase homes and vehicles as well as for businesses to acquire equipment, grow their operations, and pay their employees.