Question

Raider Chemical Co. and Ram, Inc., had similar intentions to reduce the volatility of their cash flows. Raider implemented a long range plan to establish 40 percent of its business in Canada. Ram, Inc., implemented a long range plan to establish 30 percent of its business in Europe and Asia, scattered among 12 different countries. Which company will more effectively reduce cash flow volatility once the plans are achieved?  

Answer 1

Volatility of cash flow could be reduced through diversification in different countries and continent.

Raider Chemical Co. has less diversification even after investing in Canada and the returns are limited to only two countries. Also both the countries are in the same continent.

On the other hand, Ram inc will have better diversification. Not only because it has now 3 continents (Europe, USA and Asia) but also because even within those continents, volatility risk is diversified between number of countires. They will reduce the cash flow volatility better.