Why Does Diversification Reduce Risk

question 34

Essay

Why does diversification reduce risk?

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Definitions:

Interest Rate

The amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal, typically noted on an annual basis.

Direct Write-off Method

An accounting practice where uncollectible accounts receivables are written off directly against income at the time they are deemed noncollectable.

Allowance Method

An accounting technique used to account for bad debts, which estimates and sets aside a portion of accounts receivable deemed unlikely to be collected.

Uncollectible Receivables

Debts owed to a company that are considered to be uncollectable, indicating that the company does not expect to receive payment due to the debtor's inability to pay.