Why Do Shareholders Have a Greater Preference for Risk Than

question 72

Multiple Choice

Why do shareholders have a greater preference for risk than do managers?

• A) Shareholders are always richer than managers, and can afford to take more risk.
• B) Shareholders can diversify risk by holding many securities, while a manager's career is tied up with the firm.
• C) Because they are investing in the stock market, shareholders must naturally prefer taking more risk than managers.
• D) Managers do not like risk because it hurts the value of the company.

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Definitions:

Level of Significance

The probability of rejecting the null hypothesis in a statistical test when it is true, often denoted by alpha.

One-tailed

Describes tests or confidence intervals that focus on one direction of effect or relationship, either greater than or less than a certain value.

Null Hypothesis

A statement in hypothesis testing that assumes no significant difference or effect exists between certain populations or variables.

Level of Significance

In hypothesis testing, the threshold below which the null hypothesis is rejected, often denoted by alpha.