Assume that Widget Repair Corporation provides services to 100 customers whose decision to change suppliers is uncorrelated. The portfolio effect suggests that the entrepreneur/owner of Widget, who is compensated on the basis of the firm's profits, may have lower cash-flow risk than a clerk who works full-time for Widget on a fixed salary.

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The portfolio effect suggests that when a business has a diversified customer base, the cash flow risk is reduced, which can benefit the entrepreneur/owner who is compensated on the basis of profits. In this scenario, the 100 uncorrelated customers provide a diversified portfolio of revenue streams for Widget Repair Corporation, potentially lowering the cash flow risk for the owner compared to a fixed salary employee.

Assume That Widget Repair Corporation Provides Services to 100 Customers