Question

What are methods firms use to diversify risk? What are the methods individuals use?

Answer 1

Firms uses to deiversify risk by investing in different asset class like stock and bonds as well as real assets to hedge against inflation at the same time. Main method to use to diversify risk is to find the correlation between different asset class if there is negative correlation then one should include those stock to minimize risk by diversification.

Individual can diversify risk by reducing the exposure to risky asset and find the asset class which are hdeged against the common risk like inflation or so at the same time they can avoid risk by investing in risk free asset but best strategy to is to invest in asset class which are negatively correlated so that risk can be reduced and hedged against the market downfall.