4 The risk of incurring an outsized tax bill that diminishes return if one were to sell part of the concentrated position in an attempt to reduce the other risks

问题如下：

选项：

解释：

Omo’s portfolio consists of two concentrated positions: his ownership share of his software company and his publicly traded shares in the company of his previous employer. As such, Omo’s portfolio is not an efficient, diversified portfolio.

Four important risk and tax-related considerations that are relevant to Omo’s portfolio are as follows:

1 The company-specific risk inherent in the concentrated positions

2 The reduction in portfolio efficiency resulting from the lack of diversification

3 The liquidity risk inherent in a privately held or outsized publicly held security

4 The risk of incurring an outsized tax bill that diminishes return if one were to sell part of the concentrated position in an attempt to reduce the other risks

Omo’s software company is private and fairly small, with a valuation of $200 million. Private companies, such as Omo’s software company, tend to be smaller than public companies and can possibly face some different risks compared to large companies, including a more limited operating history or an undiversified business mix, difficulty attracting high-quality management personnel, and more constraints on their access to financing. These risks, alone or in combination, make a concentrated position in a private company, such as Omo’s software company, much riskier than a similar-sized position in a publicly traded company.

Regardless of whether Omo’s investments are publicly traded or privately held, a concentrated position subjects the portfolio to a higher level of risk. Not only is Omo’s portfolio unduly exposed to the risk of adverse events affecting his company; he will not be compensated for bearing specific or unsystematic risk—risk that can be diversified away. Thus, Omo’s portfolio, with its concentrated positions, is likely an inefficient portfolio. The portfolio’s risk-to-reward ratio is less than what could be achieved in the absence of the concentrated positions.

Omo’s concentrated positions, particularly the shares in his software company, may also be subject to liquidity risk. Shares in a private company cannot be readily sold to meet unexpected expenses. This lack of liquidity complicates the management of the remaining portfolio. In contrast, since Omo’s previous employer is a public company, its shares likely have less liquidity risk since they can be sold—though sales may be constrained by regulatory restrictions and sales of large positions may incur large transaction costs.

Concentrated positions frequently have a very low tax basis, sometimes having been held by the investor for a long time. Omo has owned his company from its very beginning and bought shares in his previous company six years ago, before a substantial appreciation in value. Though Omo’s holding periods of five and six years aren’t particularly long, both positions have grown significantly in value since inception. Sale of all or a part of these positions may trigger significant tax liabilities.

While these and other considerations (notably, Omo’s possible emotional attachment to the company that has been the foundation of his financial success) make a simple sale problematic, the risk inherent in the position may outweigh the tax and liquidity issues.