Diversification Key to Risk Reduction
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Claudia Eller’s column “Partnering Studios Share Risk, Profit,” (The Biz, July 25) seems to obscure a key point.
While it is true that as the article states, a reduced investment leads to reduced potential profits, this is only half the story. The benefits of risk reduction are gained not by merely taking a smaller stake in any given project, but by taking the money saved and investing in another film. Diversification, in other words.
For example, consider two inversely related ventures whose payoff depends upon the weather: an ice cream stand or an umbrella shop. If I choose to invest in only one, my risk and percentage return are the same whether I invest all my money or only part. However, if the investment is split between the two, rain or shine, one will pay off.
In short, by investing in two films instead of one, there is less variability in the returns and thus reduced risk.
STEPHEN PHILLIPS
West Los Angeles
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