Part 1"Bank managers should always seek the highest return possible on their assets." Is this statement true, false, or uncertain? A. True. The highest return possible on assets will guarantee the highest income for the bank. B. True. Seeking the highest return possible will always prevent a bank failure. C. False. A bank must also consider an asset's risk and liquidity when deciding which assets to hold. D. Uncertain. This statement is true only if the bank has more rate-sensitive liabilities than assets.

Question

Part 1​"Bank managers should always seek the highest return possible on their​ assets." Is this statement​ true, false, or​ uncertain? A. True. The highest return possible on assets will guarantee the highest income for the bank. B. True. Seeking the highest return possible will always prevent a bank failure. C. False. A bank must also consider an​ asset's risk and liquidity when deciding which assets to hold. D. Uncertain. This statement is true only if the bank has more​ rate-sensitive liabilities than assets.

BlackTom AI · Accepted Answer

We start by restating the prompt in our own words to frame what we’re evaluating: a bank manager’s decision-making should not be based solely on maximizing return on assets, but must also account for risk and liquidity when selecting which assets to hold.
Option A: 'True. The highest return possible on assets will guarantee the highest income for the bank.' This is problematic because higher returns often come with higher risk; focusing only on return does not guarantee the highest overall income once risk, default, and potential losses are considered. It ignores the trade-off between return and risk, and it assumes returns are the sole driver of income, which is an incomplete view.
Option B: 'True. Seeking the highest return possible will always prevent a bank failure.' This is incorrect because even high-return strategies can fail if they involve excessive risk, poor liquidity, or correlation with adverse market events. Banks face failures due to liquidity crises, credit losses, or systemic shocks, not merely because returns were maximized. The claim is too absolute and overlooks risk management and resilience factors.
Option C: 'False. A bank must also consider an asset's risk and liquidity when deciding which assets to hold.' This option reflects a sound principle of banking: prudent asset selection balances return with risk and liquidity considerations. By incorporating risk (probability of loss, credit quality) and liquidity (ease of converting to cash without substantial loss), banks maintain stability and meet withdrawal demands, regulatory requirements, and capital adequacy. It aligns with risk management practices and the incentive compatibility of holding a diversified, liquid, and appropriately risk-weighted asset portfolio.
Option D: 'Uncertain. This statement is true only if the bank has more rate-sensitive liabilities than assets.' This introduces a conditional scenario about rate sensitivity that is not necessary to justify the core principle. While interest rate exposure matters, the default assertion in the question is about whether maximizing asset return alone is appropriate; introducing a conditional dependency on liability composition adds an extra complexity that is not required to evaluate the statement as a general rule. It distracts from the fundamental point about risk and liquidity in asset decisions.
In summary, the reasoning across choices shows that maximizing return in isolation neglects critical factors—risk and liquidity—that determine sound asset choices for a bank. The correct perspective integrates these factors rather than prioritizing return alone. The incorrect options either overstate inevitabilities (A, B), rely on an unnecessary condition (D), or capture the true core idea (C) with proper emphasis on risk and liquidity.

Quiz:Quiz 2

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