From the course: Corporate Finance Foundations
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Reducing risk through diversification
From the course: Corporate Finance Foundations
Reducing risk through diversification
- In the field of finance, we talk about the concept of risk a lot. Much of finance involves reducing risk, eliminating risk, or pricing risk. So what is risk? Risk is basically the likelihood of a bad outcome. Some products succeed in the market and some don't. Some ad campaigns are successful and some aren't. Any step forward involves the risk that things may not go as planned. Some risk can't be avoided. For example, insurance companies are in the risk business. A car insurance company is going to have claims that they must pay. People will get in accidents. That's the way it is. The insurance company accepts the risks of having to pay claims by charging premiums higher than what they expect to pay out. In other words, they price that risk into the premiums they charge. But some risks can be avoided. For example, don't sell to individuals or companies who have a history of not paying their obligations. You can reduce that risk by making a good business decision. Now, some companies…
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