Does diversification helps?

In this week’s lecture, I have learned that portfolio theory helps investor to maximize their return by holding a diversified portfolio of assets with various level of risk. Most of the investors are believed to receive a return for taking risk, the type of risk can be categorize in 2 different category, which are systematic risk, and unsystematic risk. Systematic risk affects all investment of a business. Unfortunately, this type of risk cannot be diversified, whereas unsystematic risk  is the risk which can be diversified in different ways to reduce the risk of one specific share or more. However, in a world of high correlation, it is hard to deal with diversification.

Research has confirmed that the act of diversification for most companies had cut down their profitability. Therefore, an investor must take serious consideration of the risk and return while taking diversification into account. However, a proper diversification reduces the unsystematic risk of business by spreading the risk into different investment. Other than that, a well diversified portfolio would maximize the profit of one’s business  . Amazon, the biggest e-retailer in the United State started their business as an online bookstore, and then diversifies to sell wide variety of stuffs such as DVDs, electronics, software and video game. What made Amazon successfully diversify into different investment in a competitive market? Is it by considering the risk and return of spreading their assets? Or by analyzing the capital asset pricing model (CAPM) including capital market line (CML) and security market line(SML) in the company? In my opinion, I think we have to take 

consideration of all of those I have mentioned.

Now, what strategy had IKEA used on their diversification in China to make it effective? In return of higher market share return,  IKEA chose to take the risk  of investing in foreign country like china. Firstly, IKEA identified its own competitive advantage among other competitors, then globalizing in Asia country with strategies like pricing strategy and joint venture. These strategies, together with other right strategy that IKEA implied over the year has successfully expand their product sales, leading to an increase in revenue as return. The graph below shows the total revenue of Ikea over the years until 2014. in the year 2015, IKEA's total sales increased by 8.9 %.

Furthermore, diversifying in china and other countries will too minimize the risk of IKEA than investing in only one country. I think that IKEA definitely made the right choice as china has become the top 1  purchasing country of IKEA’s product in 2015. China remained to be the fastest growing IKEA Group market in 2015, followed by Russia.

. 

Lastly, I think that a business could enhance their efficiency by analyzing CAPM, a model that show the relationship between risk and expected return for any risky asset. Since CML define efficient portfolios, therefore it is useful when measuring risk factor. If all the stocks and portfolios lie on the SML, it means the market portfolio is efficient, if not, then adjustment need to be done to ensure an efficient portfolio. Do you agree with the statements above? Tell me what you think. :)