Which of the following statements is correct?
A)Well-diversified stockholders do not consider a firm's corporate risk when establishing their required rates of return.
B)Undiversified stockholders, including the owners of small businesses, probably are more concerned about the corporate risk associated with a particular firm than are diversified stockholders.
C)Empirical studies to determine the factors that affect required rates of return (r) have concluded that only market risk affects stock prices; i.e., neither corporate risk nor stand-alone risk has any impact on required rates of return.
D)A firm's market risk is important, but it does not directly affect stock prices because it only affects the firm's beta.
E)A firm's market risk is not an important factor in determining its required rate of return.

Question

Quizplus · Accepted Answer

Undiversified stockholders, including the owners of small businesses, probably are more concerned about the corporate risk associated with a particular firm than are diversified stockholders. Diversified stockholders are able to spread their risk by investing in a variety of different companies and industries, so they may not be as affected by the specific corporate risk of one company. However, undiversified stockholders have a larger portion of their investments tied up in one company, so they are more susceptible to the effects of corporate risk.

Which of the Following Statements Is Correct