Question

Analysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the compan's R look good nt measure, and managers strive to make the company's ROE numbers

An increase in ROE would _____ imply an increase in shareholder wealth.
Based on your understanding of the uses and limitations of ROE, a rational investor is likely to prefer an investment option that has:
A. High ROE and high risk
B. High ROE and low risk

Answer 1

Return on equity (ROE) is a measure of a company's profitability and an increase in ROE implies an increase in shareholder wealth. A rational investor is likely to prefer an investment option that has high ROE and low risk.

Step-by-step explanation:

Return on equity (ROE) is a measure of a company's profitability and is often used by analysts and investors to compare the performance of different companies in the same industry. A higher ROE generally indicates better profitability and is considered desirable by managers and investors. An increase in ROE implies an increase in shareholder wealth because it means the company is generating more profits relative to the equity invested by shareholders.

When it comes to choosing an investment option, a rational investor is likely to prefer an option that has a high ROE and low risk. A high ROE indicates good profitability, while low risk ensures that the investor's capital is protected. This combination offers the potential for both good returns and stability in investment.