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Imagine an investment bank that has equity of 10 and operates in an economy where risk is 0.15, the policy rate is o, the rate
Imagine an investment bank that has equity of 10 and operates in an economy where risk is 0.15, the policy rate is o, the rate of return on financial assets is 0.05 and the price of financial assets is 1. Which statement below is correct? The investment bank's demand for securities (F) is a function of its equity (e), risks (z), the rate of return on financial assets (1), and the price of financial assets (P). e F = Z risk (1 + r - P) return assets Fo leverage = 1 = equity e Select one: A. The investment bank hold will hold 100 financial assets in period 0, with a leverage ratio of 1. OB. When risk falls to 0.04 in period 1 and price of financial assets rises to 1.03, the investment bank's asset holdings will increase to 500, with a leverage ratio of 100. o C. In period 2, the investment bank marks to market its financial assets. Equity will increase by 3, with 600 asset holdings at the end of the period. D. In the third period, risk rises back towards its initial period two level. The investment bank will go bankrupt if the price of its asset holdings fall 1.05. O E. None of the above answers are correct
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