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Chapter 10. Managing Risk and Uncertainty > Risk Reallocation Strategies

Risk Reallocation Strategies

You can also manage risk and uncertainty by reallocating risks to other parties. In many cases, these other parties are willing to accept this reallocated risk because they are better able to bear that risk than you are. For instance, diversified investors are often better able to bear risk than entrepreneurs because of their diversification. Investors, like venture capital firms, that are able to invest simultaneously in several risky ventures can bear risk better than entrepreneurs whose investments in new ventures are undiversified. By simultaneously investing in several new ventures, venture capitalists can design portfolios in which the risks of different ventures are uncorrelated, making the average level of risk that they bear lower than that of the individual entrepreneurs that founded the companies in their portfolios. As a result, diversified investors can bear a level of risk for given amount of return that is not possible for individual entrepreneurs to bear.

You can reallocate risk to specialized stakeholders who are better able to bear risk than you and other entrepreneurs because their specialization gives them information that makes the risk less for them than for you. For example, a factor (or company that purchases accounts receivable) can collect your bills with less risk than you can because the factor has knowledge about collection of debt that allows for the collection of a greater proportion of receivables than the average entrepreneur. As a result, specialized stakeholders are willing to bear more risk for a given amount of return than you are probably willing to bear.[6]


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