Which of the Following Is True of the Trade-Off Between

question 3

Multiple Choice

Which of the following is true of the trade-off between diversification and management control?

• A)Firms with concentrated ownership are likely to be poorly monitored and thus poorly managed.
• B)An undiversified investor does not share the benefits of control with other shareholders,but must bear alone the cost of having an undiversified portfolio.
• C)An individual investor who wishes to obtain enough shares to control management would generally have to hold an undiversified portfolio.
• D)The concentration of ownership is solely based on the costs of bearing firm-specific risk and not on management efficiency.

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Definitions:

Profit

Profit is the financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Call Premium

The additional amount that the price of a call option exceeds its intrinsic value, often influenced by time remaining until expiration and volatility.

Put Premium

The price that an investor pays for the right but not the obligation to sell a specified amount of an underlying asset at a predetermined price within a specified time frame.

Long Straddle

An options trading strategy that involves purchasing both a call and a put option on the same asset with the same expiration date and strike price, betting on volatility.