Question

Greg is the CEO of a leading company in the consumer packaged goods industry. He is trying to grow his company for personal gain and wealth. However, Greg sees that his company has an opportunity to break into the chemical industry. He has decided to invest free cash flow into acquiring small chemical companies that have the potential of growth, if funded properly. Shareholders are not happy. Their case for wanting to cease these actions is that Greg is practicing ______.

Answer 1

The answer is over-diversification

“Over diversification occurs when the number of investments in a portfolio exceeds the point where the marginal loss of expected return is greater than the marginal benefit of reduced risk. When adding individual investments to a portfolio, each additional investment lowers risk but also lowers the expected return.”