Diversification that reduces unsystematic risk is likely to be associated with less variance of a firm's cash flows.This is likely to benefit:
A)Shareholders,because they are sensitive to all forms of risk
B)Bondholders,because greater variability of cash flows increases a firm's vulnerability to default on payments to bondholders
C)Both groups
D)Neither group

Question

Quizplus · Accepted Answer

Bondholders benefit from diversification that reduces unsystematic risk because it leads to less variance in a firm's cash flows, thereby reducing the firm's vulnerability to default on payments to bondholders. Shareholders can diversify their own portfolios to manage unsystematic risk.

Diversification That Reduces Unsystematic Risk Is Likely to Be Associated