1. Consider two individuals. Both earn the same amount and choose to save the same amount. However, the first agent is more risk averse than the second.

i) Do you expect the saving portfolios to be different for the two agents? Which of the two is more likely to hold stocks?

Now, assume that the second individual is actually much wealthier than the first.

ii) Do you expect the two agents to rely on the same type of financial intermediaries? Which of the two is more likely to interact with a hedge fund/mutual fund?

Continue to assume that the second individual is much wealthier. But, now, imagine that the two individuals decide to deposit all their savings in a commercial bank.

iii) Which of the two individuals is exposed to higher risk? What would happen if the bank were to become insolvent?