Diversification whose sole impact is to reduce the variability of profits does not create value for shareholders because:
A)Shareholders are interested in return more than in risk
B)The most important risks (such as a global financial crisis or the collapse of the Euro)are systemic in nature,against which diversification offers little protection
C)The risk which is relevant to stock market valuations is perceived risk--this bears little relationship to profit variability
D)If investors can spread risk by diversifying their portfolios,diversification adds no additional value in terms of risk spreading.

Question

Quizplus · Accepted Answer

Diversification by a company does not create additional value for shareholders if the shareholders can achieve the same risk reduction by diversifying their own investment portfolios. This is because investors can spread their investments across various assets on their own, achieving diversification benefits without relying on a single company's efforts to diversify its business operations.

Diversification Whose Sole Impact Is to Reduce the Variability of Profits