Corporations by rewarding executives with large option positions:
A)cause the executives to hold highly undiversiﬁed portfolios.
B)put the ﬁrm in a risky position to pay off the options.
C)cause the value of the equity to fall because the options are theft.
D)are really valueless because most options are never exercised.
E)None of the above.

Question

Quizplus · Accepted Answer

By rewarding executives with large option positions, corporations cause the executives to hold highly undiversified portfolios. This is because executives have a significant proportion of their wealth tied up in the options of their company, making their portfolios highly concentrated in the stock of their company. This concentration can be risky, as they are subjected to any adverse events that may impact their company's stock price.

Corporations by Rewarding Executives with Large Option Positions