Diversification reduces risk by investing in vehicles that span different financial instruments, industries, and other categories. Unsystematic risk can be mitigated through diversification while systemic or market risk is generally unavoidable.

The risk-return tradeoff states the higher the risk, the higher the reward—and vice versa. Using this principle, low levels of uncertainty (risk) are associated with low potential returns and high levels of uncertainty with high potential returns.

When it comes to diversified portfolios, correlation represents the degree of relationship between the price movements of different assets included in the portfolio. A correlation of +1.0 means that prices move in tandem; a correlation of -1.0 means that prices move in opposite directions.

There are four most often cited reasons for diversification: the internal capital market, agency problems, increased interest tax shield and growth opportunities.

Diversification is a trade off. When done right, a diversified portfolio can protect investors against some risks. And it will certainly lower the magnitude of outsized returns. An index investor will get the average performance of the entire stock market each year.

Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximize return by investing in different areas that should each react differently to changes in market conditions.

An example of concentric diversification would be a computer manufacturer who diversified from clunky desktop PCs into laptop production. This would allow them to immediately take advantage of the new wave of computer users who demanded more portable solutions.

Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time. One way to balance risk and reward in your investment portfolio is to diversify your assets.

Diversification is a corporate strategy to enter into a new products or product lines, new services or new markets, involving substantially different skills, technology and knowledge. Diversification is one of the four main growth strategies defined by Igor Ansoff in the Ansoff Matrix: Products. Present. New.

The diversification ratio is the ratio of the standard deviation of an equally weighted portfolio to the standard deviation of a randomly selected security. Different portfolios have different risk-return trade-offs.

Three key advantages of diversification include: Minimising risk of loss – if one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment.

Horizontal integration or diversification involves the firm moving into operations at the same stage of production. Vertical integration is usually related to existing operations and would be considered concentric diversification.

Different levels of diversification

• 1) Close-related diversification.
• 2) Distant-related diversification.
• 3) Unrelated Diversification.
• 1) Internal to the group.
• 2) External to group.
• 3) Financial benefits (Often used in unrelated diversification)

Related diversification occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries. Some firms that engage in related diversification aim to develop and exploit a core competency to become more successful.

Turnaround strategy is a revival measure for overcoming the problem of industrial sickness. It is a strategy to convert a loss making industrial unit to a profitable one. Turnaround is a restructuring process that converts the loss-making company into a profitable one.

oRelated Linked Diversification Strategy: firm generates more than 30% of its revenue outside a dominant business (less than 70% comes from dominant) and businesses have limited links to each other. Firm shares few resources and assets across businesses.

What is Related Diversification? It is when a business adds or expands its existing product lines or markets. For example, a phone company that adds or expands its wireless products and services by purchasing another wireless company is engaging in related diversification.

Disadvantages of Diversification in Investing

• Reduces Quality. There are only so many quality companies and even less that are priced at levels that provide a margin of safety.
• Too Complicated.
• Indexing.
• Market Risk.
• Below Average Returns.
• Bad Investment Vehicles.
• Lack of Focus or Attention to Your Portfolio.

Diversification comes with its own set of risks, costs and additional resources. If these demands exceed your potential revenue and profit gains, this growth option could be too risky for your business. An ineffective diversification strategy could result in: Costly delays or mistakes.

“One of the main reasons that diversification fails is because businesses do not have the right strategy in place,” Shipilov said. “They must think carefully about what distinct resources or capabilities they can move between different markets to give them a competitive advantage.

Many companies avoid unrelated diversification as a general business rule because of the lack of synergy that exists. When you have related diversity, you can more easily integrate your company brand, philosophies, resources and partnerships to take full advantage.

The Walt Disney Company has diversified following a similar strategy, expanding from its core animation business into theme parks, live entertainment, cruise lines, resorts, planned residential communities, TV broadcasting, and retailing by buying or developing the strategic assets it needed along the way.

A related diversification is one in which the two involved businesses have meaningful commonalties, which provide the potential to generate economies of scale or synergies based upon the exchange of skills or resources. …

What makes related diversification an attractive strategy is. the opportunity to convert cross-business strategic fits into a competitive advantage over business rivals whose operations do not offer comparable strategic-fit benefits. A diversified company’s business units exhibit good resource fit when.

A strategy evaluation is an internal analysis tool and should be used as part of a broader strategic analysis for the organization when making decisions about your strategy. Typically, the strategy evaluation process involves answering questions such as: How much progress have we made towards our Vision?