Question
Which of the following statements is true? Select the correct answer from the options listed below Preference shares offer investors a lower level of risk than ordinary shares Preference shares are risk neutral to investors Preference shares offer a higher level of risk than ordinary shares Preference shares offer investors the right to become managers
Answer
4.7
(347 Votes)
George
Elite · Tutor for 8 years
Answer
Preference shares offer investors a lower level of risk than ordinary shares.
Explanation
## Step 1Let's analyze each of the four options step-by-step:1) Preference shares offer investors a lower risk than ordinary shares: This statement is generally true since preference shares have priority when it comes to the payment of dividends and during incidences of company liquidation. Preference shareholders thus have a security that ordinary shareholders lack. 2) Preference shares are risk neutral to investors: It is not accurate to say this statement because any investment contains a measure of risk. While preference shares offer less risk compared to common shares, saying that they are 'risk-neutral' might imply they include no risk at all, which is incorrect.3) Preference shares offer a higher level of risk than ordinary shares: This statement is incorrect. As we have established, preference shares are less risky when compared to common, or ordinary, shares. 4) Preference shares offer investors the right to become managers: This statement is generally false. Investing in preference shares gives no automatic right for an investor to become a manager. While shareholders get voting rights, this does not equate to a managerial role.