Question: Consider the relationship between ROE and ROA as given by the equation E [ ROE ] = i + ( E [ ROA ] i

Consider the relationship between ROE and ROA as given by the equation E[ROE]=i+(E[ROA]i)L+E[S], where ROE is the 'return on equity', ROA is the 'return on assets', S is a subsidy, L is leverage, and i is the interest rate on debt. E[] denotes the expectations operator. When applied to the case of banks, which of the following statements is correct?
Group of answer choices
Bank managers are deterred from taking excessive risk because their losses are potentially unbound
Bank owners always receive a subsidy equal to S
A riskier portfolio of loans will increase the expected value of the subsidy
The ROE is always higher than the ROA

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