Why do firms diversify and and what is there impact on firms performance?in detail

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readerofbooks | College Teacher | (Level 2) Educator Emeritus

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Firms diversify, because they do not want to have, as the proverbs says, "all their eggs in one basket." To put it another way, it is risky to be in only one company or sector. It is possible for a company or a sector not to do well. If this happens, the firm would be hit hard. Diversification is a way to hedge. 

There are a few benefit for this. First, as mentioned above, there is safety. Second, diversification allows you to sell when things are high and buy when things are low. In other words, there is greater flexibility. 

In terms of performance, a few points can be made. While it is true that a diverse portfolio can miss out on some great gains. For example, those who put all their money in gold a few years ago did very well. However, the safety of diversification causes peace of mind. In the long run, this is a good strategy that will most likely pay good gains. 

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