Which of the Following Mechanisms Is Used to Motivate Managers

question 29

Multiple Choice

Which of the following mechanisms is used to motivate managers to act in the interests of shareholders?

• A) Bond covenants.
• B) The threat of a takeover.
• C) Executive stock options.
• D) Statements a and b are correct.
• E) Statements b and c are correct.

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Definitions:

No Arbitrage

A principle stating that it is impossible to achieve risk-free profits from inconsistent or mispriced asset prices in efficient markets, as arbitrage opportunities are quickly exploited and corrected.

Risk Premium

The extra return over the risk-free rate that investors require to compensate them for the risk of holding a risky asset.

Risk Aversion

A person's or entity's reluctance to take risks, preferring lower returns with known risks over higher returns with unknown risks.

Total Risk

The complete range of possible risks, including both systematic and unsystematic risks, that can affect the value of an investment.