Question

Which statement is true?Multiple ChoiceThe less liquid assets a firm holds, the less likely it is that the firm will experience financial distress.Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.The lower the liquidity ratios, the less liquidity risk a firm has.Liquid assets generate profits for the firm.

Answer 1

Answer:

The correct answer  is (Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets).

Explanation:

Reserve requirement, especially for the banks, is designed for the sole purpose of protecting them from falling towards bankruptcy. Although, there are certain drawbacks of high reserve requirement or extremely high levels of liquidity; it can bound a firm or organisation to invest in small ventures and at lower returns on investment because such companies invest in low-risk assets.