Diversification: A Technique that Reduces Risk

566 WordsFeb 3, 20182 Pages
Diversification is a technique that reduces risk by allocating investment among various financial instruments, industries and other categories it aims to maximize return by investing in different arias that would each react differently to the same event. Most investment professional agree that although it does not guarantee against loss, diversification is the most important component of reaching long financial goals while minimizing risk. Different types of risk- Investors confront two main types of risk when investing 1. Undiversifiable –This type of risk is commonly known as systematic or market risk. This risk is associated with each and every company. Causes are things like inflation ray, exchange ray, political instability, entrust rate. This type of risk is not specific to a particular company or industry and it cannot be eliminated or reduced through diversification, its just a type of a risk that investors must accept. 2. Diversifiable- This type of risk is opposite to systematic risk known as unsystematic risk and is specific to a company, industry, market, economy this can be reduced through diversification the most common sources are business risk and financial risk. So the main motive is to invest in different assets so that they will not all be affected the same way by market events. a) The economy of scale and economy of scope needs to diversification. Diversifying significantly helps in growing a firm’s ability to grow more rapidly. The main reason
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