- Diversification

- Marketing Alternatives

- Flexibility

- Credit Reserves

- Insurance

- may be possible to reduce total variability of returns by combining several assets, enterprises or income-generating activites without undully sacrificing expected returns

- holding a combo of investments

R_T = r₁P₁ + r₂P₁

- the weighted average of the individual expected returns weighted by the percent of each investment

σ_T² = σ₁²P₁² + σ₂²P₂² + 2P₁P₂cσ₁σ₂

- the sum of the individual variances plus (minus) the covariance

-1 ≤ c ≤ 1

- the value of the correlation coefficient between the returns of investments "c" can take on a value

- diversifying amoung several enterprises and between farm and non-farm activities is a traditional approach to risk management in agriculture

- a consideration with enterprise diversification is the loss of efficiencies and returns that may be derived from specialization

- enables the manager to respond more quickly as new information becomes available to the firm

- doesnot directly reduce risk but provides a means of coping with risk

- reducing fixed costs relative to variable costs

- choosing nonspecific resources in place of specific resources

- managers taht are willing to make changes when needed or as conditions warrant

- a source of liquidity

- represented by its unused borrowing capacity

- the difference between maximum amount of potential borrowing and the amount already borrowed is the credit reserve

- highly efficient way to provide liquidity

- provides a specialized form of liquidity instead of reserving cash, credit or savings to counter losses due to events such as hail or causality loss

- protects an asset or flow of income against the occurence of specified events