Final answer:
Using long-term financing while holding highly liquid assets is a high-risk strategy, as it can lead to an asset-liability time mismatch that can cause financial instability or collapse.
Step-by-step explanation:
The combination of using long-term financing and carrying highly liquid assets can indeed be a high-risk strategy. Long-term financing often leads to obligations that extend far into the future, while highly liquid assets might not yield enough to cover these long-term costs, especially during periods when interest rates rise.
Banks may find themselves in precarious positions if they have loaned out money at low interest rates and cannot adjust the rates they offer to depositors quickly enough to match market rates. Such an asset-liability time mismatch can lead to severe liquidity crises where banks are unable to honor deposit withdrawals without incurring losses.
Throughout history, high levels of risk like this have proven to be detrimental to investment portfolios, often leading to financial instability or even collapse. However, if the company also relies heavily on long-term financing, such as long-term loans or bonds, it may face difficulties in repaying those obligations in the long term. This combination of high liquidity and long-term financing creates a mismatch in the timing of cash flows and can increase the risk for the company.