Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Terms and concepts

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Small and illiquid assets that are unable to be sold individually can be pooled together into financial instruments in order to reduce risk and to be sold to general investors. This strategy is called:
  1. Diversification.
  2. Securitization.
  3. Investment.
  4. Due diligence.
Explanation
The method of pooling small and illiquid assets into financial instruments to reduce risk and then sell them to general investors is called securitization. Because each security will represent a fraction of the total value of the diverse pool of these assets, the risk of investing in the assets is reduced.

Key Takeaway: Securities that have their value and income payments derived from and backed by this specified pool of assets are asset-backed securities.
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