Portfolio diversification of domestic firms reduces risk because cash flows are not perfectly correlated. The same reasoning is often argued for MNEs diversifying into international markets.

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Portfolio diversification of domestic firms reduces risk because different industries and sectors have different cash flows that are not perfectly correlated. Similarly, MNEs diversifying into international markets can reduce risk because economic conditions and factors affecting cash flows can differ across countries and regions. Therefore, by diversifying their operations and investments across different countries, MNEs can reduce their exposure to country-specific risks and benefit from global market opportunities.

Portfolio Diversification of Domestic Firms Reduces Risk Because Cash Flows