Question

What would you say are some of the implications for the diversification principle in investing for individual investors?

What about the implications for the leaders and managers of business as they manage the various sources of their company's free cash flows?

Answer 1

Some of the implications of diversification in investing for individual investors are as follows-

A. It would be helpful in the reduction of the unsystematic risk of the portfolio.

B. It will provide the individual investor with the possibility of gaining a greater rate of return in the portfolio because his risk will be minimised and it would be mitigated across different sectors.

C.it will protect the investors from the downside risk when there would be adverse cycle in the economy.

D. It will provide him with a sense of financial independence in the longer run.

Implications for the leaders and managers of business in respect with diversification are as follows-

A. It will help them to segregate their risk and and allocate it into different sectors.

B. It would also help them to proactively manage the cash flows in the adverse economic scenario.

C. These managers need to use diversification in order to reduce the volatility of the overall business in respect to various risks in the market.