The Risk Aversion Problem in Shareholder-Manager Agency Relationships Arises Because

question 12

Multiple Choice

The risk aversion problem in shareholder-manager agency relationships arises because:

• A) managers are more risk-averse than shareholders.
• B) shareholders prefer less risk than do managers.
• C) managers have less capital invested in the entity than shareholders.
• D) shareholders are not able to diversify their risk.

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Definitions:

Stock Market

A marketplace where buyers and sellers trade shares of publicly held companies, reflecting the economic health and investor sentiment toward those companies.

Opportunity Cost

The value of the next-best alternative when a decision is made; it's what is foregone to undertake a certain action.

Capital

Financial assets or their financial value, including funds in deposit accounts, as well as the machinery, buildings, or equipment used in producing goods and services.

Nondiversifiable Risk

A type of risk that cannot be eliminated through diversification and affects all investments across the market.