Compared to two very risky businesses that have cash flows that are not highly correlated over time and that are operating separately, the risk of a diversified firm operating in those same two businesses simultaneously is
A) somewhat higher.
B) lower.
C) the same.
D) substantially higher.

Question

Quizplus · Accepted Answer

The risk of a diversified firm operating in two businesses simultaneously is lower than that of two separate businesses operating independently as diversification brings reduced risk through the combination of cash flows. When one business experiences a downswing, the other might experience an upswing, and during unfavorable conditions of an industry, the impact on the entire firm would be reduced with the diversified portfolio.

Compared to Two Very Risky Businesses That Have Cash Flows