Question

Ceos & financial markets usually use the past year's return on equity as the main way to judge strategic performance. why can this be a problem?

Answer 1

The financial markets usually use the past year's return on equity as the main way to judge strategic performance because option b. ROE is really constrained by the long term asset and equity positions of a company, and therefore won't vary that much from period to period.

What is Return on Equity (ROE)?

Return on Equity (ROE) is known to be that which is often used to measures the net profits gotten by a firm based on each dollar of equity investment that is also been contributed by shareholders.

Note that this is one that tends to be expressed in percentage form and thus, The financial markets usually use the past year's return on equity as the main way to judge strategic performance because option b. ROE is really constrained by the long term asset and equity positions of a company, and therefore won't vary that much from period to period.

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See options below

a. CEO decisions can dramatically improve ROE in the short run.

b. ROE is really constrained by the long term asset and equity positions of a company, and therefore won't vary that much from period to period

c. ROE is only relevant to shareholders, and is not meaningful to those who own a company's bonds