Risk diversification is one of the main provisions of the economy, the essence of which is the maximum leveling of threats in the process of investment, in production, insurance and other areas of business. In this article, we will focus on this principle in detail. The main task of risk diversification in all the mentioned sectors of the economy is to prevent bankruptcy, as well as the desire to maximize profits and ensure the safety of capital.
Sharing risks in investing
In this case, we are talking about creating an investment portfolio with different profitability, liquidity and degree of reliability. For its organization, investment instruments of various types are used. It should be noted that it is advisable when creating such a set of investments to include assets related to different business areas. Thus, financial risks are diversified.
For example, investing money exclusively in stocks andbonds increases the likely risks, since the profitability and reliability of assets in this case directly depends on the situation on the stock exchanges. At the same time, a portfolio that includes, in addition to securities, foreign exchange, real estate and precious metals is subject to less economic threats.
There are assets whose value changes in one direction. In other words, they are positively correlated. So, the task of risk diversification in investing is the selection of investment instruments that have the least degree of mutual dependence. In such cases, a decrease in the value of one instrument creates the possibility of an increase in the price of another.
Risks in investing
The totality of investment risks can be divided into specific and market risks. Specific risks are those that depend on the issuer of the securities. All remaining after the elimination of the first risks are market risks. An investment portfolio with a sufficiently high level of risk diversification is almost always exposed to market threats. It is impossible to defend against them completely, but there are ways to minimize their influence.
For example, analytical studies show that a portfolio of 7-10 stocks can eliminate specific risks by 80%. But a set of 12-18 shares of various organizations ensures the safety of investments from specific risks by 90%. What does it say? That competent diversification reduces the risk of losing investments.
Varieties of risks ininvesting
In addition, there is another classification of investment risks, which we will discuss below. They share the state and economic risks of a segment, industry or individual company. State risks are caused by a possible change in the regulatory framework and, accordingly, the climate for doing business. There is a possibility of nationalization of individual enterprises.
One of the main risks in investing are economic threats. They may depend on the relevant market conditions, global or local financial crises and recessions. The risks of the investment instrument segment are threats specific to the sector of the national economy in which part of the funds was invested. An example is the real estate market in the process of crisis, which is fixed by a decrease in the cost of apartments, houses, offices and other objects. Another example is stocks, the price of which can collapse during a stock market crisis. Diversification of own investments plays a decisive role in risk management. Let's look at a few more examples.
Industry risks are threats that may occur when demand for a product falls. For example, an investor purchased shares in an oil refinery, and the global value of "black gold" collapsed. In this case, the price of shares of the acquired enterprise on the stock exchange will decrease. The risks of an individual organization represent the possibility of bankruptcy, reductionproduction volumes and market share, as well as other crisis phenomena in a single company.
Risk minimization
Let's consider risk diversification methods. It is impossible to completely protect your investment portfolio from them. However, minimizing is quite realistic. For example, government risks are reduced by distributing threats among different countries. Large investment organizations and private investors acquire assets of foreign enterprises and entire countries.
Economic risks can be minimized by investing in assets of different classes. Among experienced investors, it is known that the fall of the stock market is accompanied by an increase in the cost of gold and other precious metals. Risks by segments of the economy can be leveled using a tool such as hedging. Its essence lies in the acquisition of futures of specific assets with a fixed price. Thus, the risk of a fall in the value of shares of these assets on other trading floors is eliminated. What other ways are there to diversify risks?
To reduce sectoral risks, the method of including assets belonging to various sectors of the national economy into the investment portfolio is used. For example, securities of oil companies can be supplemented with shares of organizations from the financial sector of the economy. Most often, as such insurance, issuance documents of the so-called "blue chips" are used - companies with the highest profitability, liquidity and reliability. Secure your investment portfoliothe risk of bankruptcy of one organization will help investing in several companies in the same industry.
False diversification
Let's consider another type of risk distribution. False diversification is a common phenomenon among inexperienced or novice investors. It is also called "naive". It is characterized by the protection of capital only against certain risks, which does not provide high guarantees for the preservation of the investment portfolio. Let's take an example. An investor purchases shares in five different oil refining companies. Diversification as such is present, but given the fall in world oil prices, there will be a decrease in the value of shares of these enterprises. In general, this will cause a reduction in the cost of the entire investment portfolio.
Distribution of risks in production
The principle of risk diversification is also used in production. In this case, we are talking about a set of measures that are aimed at increasing the stability of the company, protecting it from possible bankruptcy, and increasing profits. What are these mechanisms? First of all, we are talking about expanding the production line, launching new technological lines and expanding the range of manufactured products. The development of new directions that are not connected with each other is a classic example of diversification in production.
Types of production risk distribution
Let's take a closer look at diversification in production and its types. In enterprises, it can be of two types. The first implies the connection of new directionsentrepreneurial activities with those already existing in the company. Another type of risk allocation in production involves the creation of a new product or service that is not related to the product already produced by the organization. This is lateral diversification.
Vertical and horizontal distribution of risks
A related type is when a company carries out activities in the previous or next stage of the production chain. For example, an organization producing equipment begins to independently manufacture components for its devices. Thus, the company diversifies down the chain. Another example can be given when an enterprise producing microprocessors begins to independently assemble ready-to-use personal computers. In this case, we have illustrated models of the so-called vertical diversification. But along with it, another type is used.
Horizontal diversification is the production of related products by an organization. For example, a company specializing in the production of television sets launches a line for the manufacture of telephone sets. At the same time, this product can be presented on the market under a new brand or under an existing one.
Risk diversification in insurance
Risk distribution is also actively used in the insurance business. In this sector of the economy there are tools that are specific for this particular area.entrepreneurial activity. First of all, we are talking about the mechanism for transferring risks related to the assets of the insurer or its liabilities. We list the most common. The methods of redistributing risks in insurance, inherent in the assets of the insurer, include the expansion of the pool of assets and the use of various financial instruments. Reinsurance and securitization of insurance liability can be attributed to ways to diversify risks related to liabilities.
