Question

1. What types of risks should shareholder wealth-maximizing managers seek to offset in a firm they are managing? Why?

2. How can patents, copyrights, and legal challenges be used to manage business risk?

Answer 1

1. Types of risks that shareholder wealth-maximizing managers must seek to offset in a firm are systematic risks, business risks, credit risk, and interest rate risks.

Systematic risks are basically market risks which remain in the market and cannot be diversified and hence wealth managers must use the portfolio in such a manner for the firm which mitigates the risk factors. Business risks lie when the company anticipates having a loss in the market rather than gaining profits from the business. Credit risks lie in the business when the firm becomes unable in paying off its dues in the form of principal and contractual interest to its bondholders. Interest risks is another area where the sharp rise in the yield curve creates a fall in the prices of the bond while a fall in the yield curve helps in the rise of the bond. Wealth Managers should anticipate the changes in all these areas so that they can help the firm in maximizing their profits.

2. Patents, Copyrights, and legal challenges are potent tools for managers to manage the business risks. Business risks are such in which companies anticipate a loss in the market rather than gaining a profit, now to counter this scenario if companies can use patents and copyrights to safeguards their products (in their name) then companies can expect to increase their top line as well as their bottom line. Legal challenges or litigation is another area where companies can challenge its competitors if they use their products wrongfully.