Question

Shareholders have many risk preferences when investing in the companies, so how should the directors of the quoted companies handle this situation ?
A By taking feedback from the shareholders

B The shareholders should minimize risk

C By aiming to maximise market capitalisation

D Regardless of risk, By maximising expected returns

Answer 1

Shareholders have voting power. For most decisions, voting is undertaken during the annual general meeting or an extraordinary meeting. This is the method of taking a feedback from the shareholders. If a decision is voten in favor by the designated majority, then the board of directors go ahead with the decision otherwise they dont. This makes option A the correct answer.

Minimizing risk is not always a good idea. Because minimizing risk also means to compromize with the return. This implies that those investors with high risk taking capacity are losing out for the benefit of the low risk capacity shareholders. Therefore this doesn't solve the purpose of balancing the risk appetite of different investors. So option B is incorrect.

Maximizing market capitalization means increasing the share price. This can come from any kind of activity, whether taking up very high risk investments or optimistic market sentiment. This actually might have no effect on the risk balancing. So option C is incorrect

Maximizing expected return without considering the risk is the complete opposite approach of option B. This implies that those investors with low risk taking capacity are losing out for the benefit of the high risk capacity shareholders. Therefore this doesn't solve the purpose of balancing the risk appetite of different investors. So option D is incorrect.