Question

A prospect is heavily invested in the common stock of an employer's company, ABC, relative to other investments. The stock has performed well over the last 15 years and the prospect is very happy with the investment. After reviewing financial and nonfinancial criteria, you have determined that A) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk. B) owning too much ABC stock has increased credit risk to an unacceptable level. C) he should begin to liquidate the ABC stock using the FIFO accounting method. D) because ABC has performed well over a 15-year period, he should keep the stock but sell it if inside information indicates a fall in value is imminent.

Answer 1

Answer: A) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk.

Step-by-step explanation:

We should note that in this case, the prospect has a large investment in the company and therefore is exposed to non systematic risk.

To reduce the risk due to the prospect's large investment, it is advisable for the prospect to sell part of the portion of ABC stock and then the proceed gotten from the sale can be used to buy mutual funds. This is diversification and helps reduce risk.