You are concerned about one of the assets in your fully diversified portfolio. You just have an uneasy feeling about the CFO, Ian Malcolm, of that particular firm. You do believe, however that the firm makes a good product and that it is appropriately priced by the market. 

Should you be concerned about the effect on your portfolio if Malcolm embezzles a portion of the firm’s cash?

Discuss in light of your readings on diversification of assets in a portfolio. Further assume your friend Jane is trying to decide to purchase stock from that same company. Jane doesn’t hold a diversified portfolio like you do. 

Based on the relationship between risk and return, will you be willing to pay a higher price for the stock than Jane? Explain.

Answer rating: 100% (QA)

Solution a CFO embezzling cash is a firm specific risk and can be diversified away by hol... View the full answer