In order to find risk-adjusted discounting rate, we have to take help of proxy firm. Rebalancing is a key to maintaining risk levels over time.It's easy to find people with investing ideas—talking heads on TV, or a \"tip\" from your neighbor. Being diversified can help in balancing such surprises. A mismanaged diversification or excessive ambition can lead to a company over expanding into too many new directions at the same time. Each strategy focuses on a specific method of diversification. This may also reduce the expected return on a portfolio, but it depends on level and type of diversification. There will always be unpleasant surprises within a single investment. Depending on the applied criteria, there are different classifications. Decision Making: Whether to Diversify or not. The three types of diversification strategies include the concentric, horizontal and conglomerate. Types Of Diversification Strategies. Companies can do this by purchasing or merging with another company in the desired industry. Financial Management Concepts In Layman Terms. Diversification is a strategy that mixes a wide variety of investments within a portfolio. This strategy of diversification refers to an entity offering new services or developing new products that appeal to the firm’s current customer base. Diversification in finance is a method of trying to protect an investment portfolio by reducing exposure to the risks associated with any single asset or group of assets. Conglomerate Diversification – Conglomerate diversification is a type of growth strategy that strives to add new product or service offerings that are different than the present product or service, usually totally unrelated to the business’s current business. Diversification provides movement away from activities which may be declining. Diversification is a strategic approach adopting different forms. There are three types of diversification: concentric, horizontal, and conglomerate. You can either buy a mutual fund that is broadly diversified, or you can buy a portfolio of mutual funds across various sectors and create your own diversification. Diversification is an asset allocation plan, which properly allocates assets among different types of investment. Diversification of your investment portfolio is a means of protection against this type of risk, as it can mitigate the impact of this type of risk. The purpose of diversification is to reduce volatility and improve overall performance. It is a “big picture” view of the organisation and includes deciding in which, product or service markets to … Diversification strategies allow a firm to expand its product lines and operate in several different economic markets. The strategy in which an organization plans as to how to enter into a new market which the organization is not in, while at the same … The different types of diversification strategies include the modernization and development of new products, updating the market, new technology licensing, distribution of products by another company and even the alliance with the said company. When companies engage in conglomerate diversification strategies, they are often looking to enter a previously untapped market. Diversification allows for more variety and options of products and services. Enjoy the remaining portion of the year. I really like engaging in research and it’s really easy to understand why. Brand loyalty may also be reduced if new management does not maintain current product quality. 2 comments; 46,459 views; The different types of diversification strategies include the modernization and development of new products, updating the market, new technology licensing, distribution of products by another company and even the alliance with the said company. The most common strategies include concentric, horizontal and conglomerate diversification. It can boost the growth of the firm thereby leading it towards wealth maximization. The upside to this diversification strategy comes from increasing flexibility and reaching new economic markets. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms". I agree with the statement "Moving into a totally unrelated industry is often highly dangerous, as the company’s current management is unfamiliar with the new industry." Agriculture Diversification refers to either a change in cropping pattern or the farmers opting for other non-farming options like poultry farming, animal husbandry, etc. These cash flows should be discounted with the risk-adjusted discounting rate. However, the entry of Quaker oats into the fruit juice business, Snapple lead to a very costly failure.After knowing the meaning of diversification, we’ll see the reasons why companies opt for the same.eval(ez_write_tag([[250,250],'efinancemanagement_com-medrectangle-3','ezslot_2',198,'0','0'])); The following are the reasons why firms opt for diversification: On gaining knowledge on the concept of diversification, let’s have a look at the advantages and disadvantages of the same. 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