Chapter 8 enabled us to take a closer look at risk. Our team projects have a high discount rate of 15% which is commensurate with the risk of a new initiative. As we continue to work on our projects, please discuss the following:

What is diversification and how does it impact expected return using Table 8.1 in Chapter 8?

How might diversification work to a business's advantage if it has divisions offering different products and services in multiple locations?

What are the differences between systematic and unsystematic risk? Please give an example of each.

Describe how you can diversify away unsystematic risk in a stock investment portfolio and in your 401k retirement savings account?

Chapter 8 Risk Analysis in Investment Decisions 293 TABLE 8.1 Diversification Reduces Risk Investment Ice cream stand Weather Sun Rain Probability 0.50 0.50 Return on Investment 60% -20 Weighted Outcome 30% -10 Expected outcome = 20 Umbrella shop Sun Rain 0.50 0.50 -30 50 -15 25 10 Expected outcome = Portfolio: 1/2 Ice cream stand and umbrella shop Sun Rain 0.50 0.50 15 15 7.5 7.5 Expected outcome = 15%