Diversification: A Technique that Reduces Risk

According to Ansoff (1957), there are three types of generally accepted diversification opportunities: vertical, horizontal and lateral, applicable mainly to product-oriented

Diversification is a basic principle in investing the idea being that since you cannot possibly know beforehand which stocks will perform better or worse than the average, you cannot afford to put all of your money into one company, or even in companies within a single industry. One resorts to diversification to spread the risk -- and opportunity. The average returns are obtained by diversifying.

Risk refers to any potential problems that would threaten the likelihood of success for or any project. These potential problems might prevent a project from achieving some or all of its objectives by increasing time and cost. Risk factors can even

The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains

Systematic risk or market risk is the risk that affects a large number of assets. Examples of systematic risk are inflation or increasing the interest rate, or any uncertainties in the economy but not the company 's performance. Unsystematic risk is the risk that mainly associated with specific companies or may be some competitors and suppliers. The systematic risk affects the whole market and cannot be controlled by investors. Unsystematic risk however affects the company and is controlled by the company 's performance. When investors invest money into a company they must research all aspects of that company so they are aware of the unsystematic risks they may encounter.

Diversification is when a business introduces a new product to a new market. It is one of the great ways to seek the profit by introducing new products and hoping to sell. Diversification is part of the four main growth strategies defined by the Product/Market Ansoff matrix.

Risk is defined as the probability that a company will become insolvent and will not be able to meet its obligations when they become due for payment. The profitability versus

Diversification of risk is not putting all your money into one thing, such all putting your money into all bonds. You can diversify your investments by investing in different things such as international stocks, DJIA, bonds, and different types of stocks.

• The entity 's business risk - The risk that the entity will not survive or will not be profitable.

Market risk, or beta risk, is described as a reflection of a project on stockholders’ risk of a diversified portfolio. Many factors can influence the market such as war, inflation, and recession. Market risk is measured by the firm’s beta coefficient to determine the effects the market has on the portfolio. In addition to market risk, there are two forms of risk that managers use to calculate the risk of a particular project related to holding a diversified portfolio. Stand-alone risk is used when the firm’s only holds one asset or a single stock. Corporate, or within-firm risk is the measurement of all assets or stocks held by the firm. Of these three risks, the Capital Asset Pricing Model states the market risk is the risk

Furthermore, business risk is the possibility a company will have lower than anticipated profits or experience a loss rather than taking a profit (Business Risk, 2015). Business risk is affected by several factors including competition, input costs, sales volume, economic changes and government regulations. In addition to operating leverage, financial leverage and business risk, financial risk must also be considered. Financial risk is the possibility that shareholders will lose money when they invest in a company that has debt, if the company's cash flow proves inadequate to meet its financial obligations (Financial Risk, 2004). A firm that operates

Diversification is a technique that targets to improve business's potential by spreading the risks to a wider spectrum of activities ADDIN EN.CITE Merna2011436(Merna & Al-Thani, 2011)4364366Merna, T.Al-Thani, F.F.Corporate Risk Management2011United StatesJohn Wiley & Sons9781119995104http://books.google.co.ke/books?id=F-RfoNWYZ6YC(

a. Objective(s). It is out of doubt that no matter how diversified the portfolio is, systematic risk can never be eliminated. The risk associated with individual stocks can be reduced, but general market risks affect almost every stock. So it is important to diversify between different asset classes and industries as well. The key is to find a medium between risk and return. The objective of this paper is to discuss importance of diversification of investment portfolio within industries and project the theory on the example of two portfolios. The first portfolio tends to be undiversified and consists of shares of companies from banking sector. The undiversified portfolio is as follows:

Financial risk is the risk a corporation faces due to its exposure to market factors such as interest rates, foreign exchange rates, commodities and stock prices. Financial risks for the most part, can be hedged due to the existence of large, efficient markets through which these risks can be transferred. This is unlike operating risk, which is associated with more manufacturing and marketing activities. Operating risk cannot be hedged because these risks are not traded.

Diversification is defined as the expansion of the firm across product, geographic, and customer markets. Firms have traditionally relied on this strategy for one of three major goals: growth, risk reduction, and profitability. Commonly sough benefits include scope economies (via shared resources and capabilities across businesses), economies from internalized transactions, and improved access to market information (Grant, 2010). The benefits of scope economies are often referred to as synergies. Other rationales include the firm’s efforts to escape an increasingly unattractive market and to make effective use of surplus cash flows by investing them in more attractive products or services. (Pg 22). Research has shown that by diversifying, businesses can decrease its financial losses which is identified by its higher debt to capitalization ratio.