Banks G and H are the same size and have similar operations. Bank G holds the minimum level of capital, and Bank H holds a higher level of capital. Bank G's return on equity is probably ____ volatile than that of Bank H. Bank G's risk premium is probably ____ than that of Bank H.
A)less; lower
B)less; higher
C)more; higher
D)more; lower

Question

Quizplus · Accepted Answer

C) Bank G, holding the minimum level of capital, is more leveraged and thus more susceptible to fluctuations in return on equity due to its thinner capital buffer. This increased leverage also implies a higher risk premium, as investors would demand higher returns for the increased risk.

Banks G and H Are the Same Size and Have