Shareholders seek to maximise company profits while minimising risk
However, lower risk businesses are usually accompanied with lower returns and high risk businesses with higher returns
Comparisons between various risk and return profiles can be measured using the Sharpe ratio – return per unit of risk
Combinations (degree of balance sheet investment) in individual portfolios could realise higher returns per unit of risk than what is achievable in an individual business unit – some combinations are not always obvious
By exiting a higher risk-return portfolio BU J, ABC would be able to increase its return per unit of risk from 4,3 to 4,5
It is often psychologically difficult for businesses to exit high return portfolios
Emotional decision-making can be muted by applying the logic of modern portfolio theory in the board room
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