1 Answer | Add Yours
I assume that you are asking about this in the context of determining the Capital Adequacy Ratio for a financial institution. If so, the reason for this is the fact that different types of assets carry different levels of risk for an investor.
Financial institutions need to know how much capital they need to retain in their possession. They need to try to figure out how much to keep so that they can cover any losses that may arise due to bad investments on their part. For this reason, they calculate Capital Adequacy Ratios.
Of course, these ratios will vary with the degree to which their assets are or are not risky. For example government bonds issued by a stable government carry very low risk while the bonds issued by some companies are much more risky, so they have lesser or greater weight. When determining the Capital Adequacy Ratio, these different types of assets are weighted differently so that an institution with riskier assets would need to keep a higher proportion of their assets in their own possession in case the risky assets lose their value.
We’ve answered 319,197 questions. We can answer yours, too.Ask a question