Diversification and risk reduction : risk and returns for related diversifiers

Abstract

Diversification is a strategic option that faces many executives especially when their current industry is under pressure or they have surplus fund to invest. However, the literature is divided as to the merits of diversification, the role of relatedness to the returns for the final firm and the risk profile of the firm post diversification. In this paper I show the relationship between diversification, performance and the influence that relatedness has on the performance and risk of firms. Further detail on the methods as to how these benefits are attained are also explored. The theoretical work and the results match well and a solid result re the merits, pitfalls and outcomes around relatedness and diversification are presented.