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 (k) 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.
E) Market risk does not play any role in determining the rate of return on an investment.

Question

Quizplus · Accepted Answer

Undiversified stockholders, such as owners of small businesses, are more exposed to corporate risk than larger, diversified stockholders. Thus, they are more concerned about the potential risks associated with a particular company's operations and financial management. This is also supported by literature on behavioral finance.

Which of the Following Statements Is Correct