Asked by Tiffany Smith on Jun 09, 2024
Verified
Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the company's executives may take on greater risks than stockholders desire. This example illustrates
A) moral hazard and market risk.
B) moral hazard and firm-specific risk.
C) adverse selection and market risk.
D) adverse selection and firm-specific risk.
Moral Hazard
The situation in which an entity has the incentive to take undue risks because the cost of those risks will be borne, at least in part, by others.
Firm-Specific Risk
The risk associated with an individual company, which can be reduced through diversification in investment.
Market Risk
The possibility that investors might incur losses because of elements influencing the general performance of the financial markets.
- Distinguish between the concept of moral hazard and other risk-associated terminologies within the realms of insurance and finance.
- Understand the significance of diversification in mitigating risk in investments.
Verified Answer
Learning Objectives
- Distinguish between the concept of moral hazard and other risk-associated terminologies within the realms of insurance and finance.
- Understand the significance of diversification in mitigating risk in investments.
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