Mike Kelloway, CFA is the portfolio manager of Maple Leaf Investment Inc. and is having a conversation
Question:
Mike Kelloway, CFA is the portfolio manager of Maple Leaf Investment Inc. and is having a conversation with Sofia Summers, analyst of the same firm, on the preferences investors have with regards to management decisions. He makes the following statements to her:
Statement 1: Because shareholders have unlimited upside potential and limited downside potential, they prefer management to invest in projects that involve greater calculated risks and potential returns.
Statement 2: For bondholders, the upside potential is limited by the face value of the debt less the coupon.
Statement 3: Because bondholders cannot control management the way shareholders can with their votes, they often rely on covenants to protect the safety of their investments
With respect to investor preferences to management's decisions, which statement is incorrect?
a) Statement 1
b) Statement 2
c) Statement 3