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Homework answers / question archive / 1)Which of the following statements about the nonsystematic risk of a specific security is/are not true? Select one or more: A
1)Which of the following statements about the nonsystematic risk of a specific security is/are not true? Select one or more: A. It cannot be diversified away. B. It is higher than systematic risk. C. It is likely to be related to financial market condition. D. It is also called the firm-specific risk. E. It depends on firm's business conditions.
2)Which of the following statements is correct?
A) Agency problems partly arise because of imperfect information and risk aversion.
Agency costs thus can be reduced by improving the flow of information and by reducing risk borne by the managers.
B) Agency problems partly arise because of imperfect information and risk aversion.
Agency costs thus can be reduced by restricting the flow of information and by reducing risk borne by the managers.
C) Agency problems partly arise because of imperfect information and risk aversion. Agency costs thus can be reduced by improving the flow of information and by reducing risk borne by the principals.
D) None of the above.
1)
A,B,C
A is not true since nonsystematic risk can be diversified away by diversification
B is not true since nonystematic risk can or cannot be higher than systematic risk
C is not true since nonsystematic risk if firm specific risk and not mainly related to financial market condition
D is true since nonsystematic risk is referred to as firm-specific risk
E is also true since this risk is firm specific and depends on the individual firm's condition
2)
Agency problems are partly arising because of the imperfect informations and risk aversion so there would be proper flow of information improvement and it can also be reduced by reducing the risk which are borne by the managers so the overall interest of the principles can be protected.
Managers aregeneral engaging in taking higher risk project and that can lead to agency conflict because higher risk can put the organisation in danger.
Correct answer will be option (A) Agency cost can be reduced by improving the flow of Information and by reducing the risk borne by the managers.
