Working Paper: CEPR ID: DP14119
Authors: Richard Friberg
Abstract: This paper develops a framework using Monte Carlo simulation to examine risk/return properties of intra-industry product portfolio composition and diversification. We use product-level data covering all Swedish sales of alcoholic beverages to describe the risk profiles of wholesalers and how they are affected by actual and hypothetical changes to product portfolios. Using a large number of counterfactual portfolios we quantify the diversification benefits of different product portfolio compositions. In this market the most important reductions in variability come from focusing on domestic products and from focusing on product categories that have low variability. The number of products also has a large effect in the simulations, moving from a portfolio of 10 products to one of 20 products cuts standard deviation of cash flows in relation to mean cash flows by more than half. The concentration of import origins plays a minor quantitative role on risk/return profiles in this market.
Keywords: diversification; enterprise risk management; monte carlo; product portfolios; risk return relation
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| product portfolio composition (L21) | risk-return profiles (G11) |
| increasing product count (C69) | variability of cash flows (G32) |
| domestic products and product categories with low variability (L68) | variability of cash flows (G32) |
| concentration of import origins (F14) | risk-return profiles (G11) |
| individual product variances and covariances (C29) | variability of cash flows (G32) |