Work Diversification

Diversification is the spreading of an investment amongst many assets. The theory behind diversification is that some of the risk can be reduced by being diversified (Ross et al., p. 343). Diversifying one’s portfolio does not completely eliminate risk; it only reduces unsystematic risk is a risk that affects a single asset or a small group of assets which are unique to an individual company or asset to a certain point (Ross et al., 2011). Investing in one stock would put me at the mercy of the company. Personally I feel that If I was to invest money into a company that didn’t have data to support the company would be quite risky. Having more information about the company would decrease the risk of the venture. Investing all that money into a company and something negative was to happen you could lose everything. Investing a little money by spreading it out would lead to less lose and the possibility to gain from the other investments.

After observing the table there is a clear difference in the debt ratios of high leverage and low leverage companies. In this table the lowest debt ratio for a high leverage industry was 25.06 % while the highest for a low leverage company was 7.81% (Ross et al., p. 479). What I notice about the types of industries that have high leverage such as: air transport, communications, building construction, hotel, lodges and paper, high assets, they are all high use, high debts. Whereas the debt ratios are lower in the “high-growth industries” because there is a future in these things.

The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric . information, and in an efficient market, the value of a firm is unaffected by how that firm is financed It does not matter if the firm's capital is...