Innovative approach to systematic risk reduction through industry diversification

In the paper we create the methodology to compare cost of capital reduction in case of diversification in comparison with specialized companies. We use the mechanism of coinsurance, which influences on the decline of the systematic risk of the business. We take into account not only the real costs of diversification, but also the opportunity costs. To illustrate the increase in the difference between real and opportunity costs with the increase of diversification degree, we compared the average cost of capital for subsamples. These subsamples are formed on the basis of business concentration and the variable value of coinsurance

Keywords: excess cost of capital, degree of business concentration, effect of coinsurance, industrial classification


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