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Question:

Which of the following types of institutions is most likely to have the lowest risk tolerance?

A Commercial bank.
explanation

Banks typically need to maintain excess reserves in order to meet regulatory requirements. As a result, a bank must invest in assets that are more conservative than those invested by other types of financial institutions. An endowment will usually have significant long-term spending requirements in addition to its current expenses. Thus, a college endowment should accept higher risk in order to attain the returns indicated by its mandate. A mutual fund company may invest in many types of securities depending on the type of funds being managed. Investments may range from conservative money market funds to more aggressive derivatives. Therefore, a mutual fund company’s level of risk tolerance may be greater than or less than those of a bank or endowment.

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