Which of the following statements is true about the adverse selection in securit

Question

Which of the following statements is true about the adverse selection in securities market?

A) When private firms collect and produce information about firms seeking to finance their activities, the problem of adverse selection can be mitigated without the free-rider problem.

B) Only a government can solve the adverse selection problem perfectly.

C) The key factor which explains how banks help mitigate adverse selection is that private loans are not traded in the open market.

D) None of the above.

Explanation / Answer

True it is the function of the financial firms which helps in mitigating adverse selection. Individuals and small savers do not have such resources

B False even financial system can and there is no perfect solution

C false as happened in financial crisis mortgage backed securities are traded and can create real problems

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