ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk
Brindle Foods is a family-owned company whose directors are reluctant to expand because a failure might lose family wealth. Its competitors, owned by diversified institutional shareholders, are expanding aggressively. Which factor best explains the difference in risk attitude?
Diversified institutional shareholders can spread firm-specific risk across many holdings, so they tolerate more risk in each company. Family owners hold concentrated wealth in one business, bearing the full firm-specific risk, which makes them more risk averse and cautious about expansion.
- AInstitutional shareholders can diversify their holdings, so they are less concerned by firm-specific risk than undiversified ownersCorrect
- BInstitutional shareholders have lower risk capacity than family owners
- CFamily owners are always risk neutral
- DAggressive expansion eliminates systematic risk
Explanation
Diversified investors can spread firm-specific risk across holdings, so they accept riskier individual projects. Family owners hold concentrated wealth and are exposed to the full firm-specific risk, making them more averse. The other options are factually wrong or irrelevant.
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