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Profits can be easily cast as the premiums a firm charges for the risks it assumes on behalf of its customers i.e., risk transfer charges. Depositors charge banks and lenders charge borrowers interest, partly to compensate for the hazards of lending such as the default risk. Shareholders expect above "normal" that is, risk-free returns on their investments in stocks.
Depositors charge banks and lenders charge borrowers interest, partly to compensate for the hazards of lending such as the default risk. Shareholders expect above "normal" that is, risk-free returns on their investments in stocks. These are supposed to offset trading liquidity, issuer insolvency, and market volatility risks.
That cash not equity or corporate debt is the veritable substitute for risk-free securities is a basic tenet of modern investment portfolio theory. Moreover, the "perfect substitute" hypothesis assumes the existence of efficient markets and frictionless transmission mechanisms. But this is a conveniently idealized picture which has little to do with grubby reality.
It is further anticipated that financial intermediaries pension funds, banks, mutual funds will tread similarly. If unable to invest the savings of their depositors in scarce risk-free i.e., government securities they will likely alter their investment preferences and buy equity and debt issued by firms. Yet, this is expressly untrue.
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