Which of the following statements is correct?
A) If a firm's stockholders are well diversified,we know from theory and from studies of market behavior that corporate risk is not important.
B) Undiversified stockholders,including the owners of small businesses,are more concerned about corporate risk than market risk.
C) Empirical studies of the determinants of required rates of return (r)have found that only market risk affects stock prices.
D) Market risk is important but does not have a direct effect on stock price because it only affects beta.

Question

Quizplus · Accepted Answer

Undiversified stockholders, including owners of small businesses, are more concerned about corporate risk than market risk. This is because they have a larger portion of their portfolio invested in one company, making them more vulnerable to company-specific risks. Theory and studies of market behavior also suggest that corporate risk is important, even for well-diversified investors, as it can affect a company's future cash flows and ultimately its stock price. Empirical studies have also found that both market risk and company-specific risk, or "beta," affect required rates of return and stock prices. Therefore, options A, C, and D are incorrect.

Which of the Following Statements Is Correct