An investment advisor explains to a new client that financial intermediaries play a crucial role in the capital markets. Which of the following is NOT a characteristic function of a financial intermediary?

Question: An investment advisor explains to a new client that financial intermediaries play a crucial role in the capital markets. Which of the following is NOT a characteristic function of a financial intermediary?

Answer options:

• Providing a mechanism for transferring funds between savers and borrowers.
• Transforming maturities of financial assets to suit diverse investor needs. ✅ Assuming significant credit risk by taking positions in illiquid assets without diversification.
• Reducing transaction costs through economies of scale and expertise.

Correct answer: Assuming significant credit risk by taking positions in illiquid assets without diversification.

Explanation: Financial intermediaries generally diversify their holdings to manage and mitigate credit risk, rather than assuming significant, undiversified risks. They facilitate the flow of funds, transform maturities, and reduce transaction costs.