Question 12.C-R-Q.1: Outline the case for and against a business pursuing a polic...

Diversification may help a business reduce its overall risk. When one industry is flourishing, another may be struggling. By having a presence in more than one industry, therefore, a diversified business can reduce the volatility of its total sales and earnings. It may also be better placed to withstand a downturn in one of the industries in which it operates. Cash and other resources from a flourishing operation may be used to sustain another operation in difficulties.
Diversification may not, however, lead to an increase in shareholder value. It is often the case that a premium must be paid to acquire the shares of another business. This raises the question as to whether diversification by a business can provide any benefits to shareholders that cannot be achieved on their own account. It may be easier and cheaper for individual shareholders to invest in a diversified portfolio of shares.