Explain the trade-off between diversification and control.

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The Answer is An individual investor who wishes to obtain enough shares to control management would generally have to hold an undiversified portfolio.Although the investor would benefit by getting management to make value-maximizing decisions,he or she would bear significant costs by holding an undiversified portfolio.Hence,investors face a trade-off between diversification and control.The undiversified investor,however,shares the benefits of control (the higher share price)with other shareholders,but must bear alone the cost of having an undiversified portfolio.Firms with concentrated ownership are likely to be better monitored and thus better managed.

Explain the Trade-Off Between Diversification and Control