Abstract
A one-period model is developed to show the effects of both systematic and total risk on the following owner-manager decision parameters : his ownership in the firm, α; his ownership in the market portfolio, ; and investment size, I. The owner-manger, who is assumed to maximize his end-of-period expected utility of wealth, will retain greater ownership, α, reduce the investment size, I, and hold less money in the market portfolio when systematic risk is positive and increasing. The ownership variable, α, will shift in the same direction as systematic risk shifts, while investment size, I, and ownership in the market, γ, will shift in the opposite direction. An increase in total risk is shown to have a positive impact on α if systematic risk is of sufficient size, and a negative impact on I. On the other hand, the owner-manger's investment in the market portfolio is found to be unaffected by the total risk of the investment in the firm.
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