Money and Banking Assignment Example | Topics and Well Written Essays - 250 words - 2

Money and Banking - Assignment Example The capital asset pricing model functions on the assumption that all the involved stocks in the investment portfolio are risk-averse. The investors who apply the model in the determination of stock portfolio are price takers. Stock price can never be predicted with certainty because of the volatility of the economic environment. Additionally, the prices of different companies are independent of each other. The economic dynamism does not favor all stock. This explains that the ‘hot’ stock tips are not valuable. During a financial crisis, there is a liquidity problem. The problem requires the acquisition of sufficient funds to resolve the crisis. The repurchase of the shares of the commercial banks is not prudent. An increase in the return on equity reflects the high performance of a bank. Good performance indicates that the senior executives are running the bank in an efficient and effective manner. The return on equity indicates the marginal return of the use of the shareholders holding in the bank. The market conditions do not favor only specific performer. The market is usually dynamic given the fact that the market players face unsystematic risks in the course of their operations. This makes different firms emerge winners in different