Risk pooling
What is Risk pooling?
Combining imperfectly correlated risks reduces portfolio variability.
How Risk pooling works
Stress-test the portfolio against common shocks. Distinguish diversification inside the firm from diversification available to its investors, and identify why internal pooling enables otherwise unavailable projects.
The question to ask of a company
How correlated are the bets under stress, and can competitors obtain equivalent diversification through external financing?
Examples
- Illustrative scenario: Ten development programs appear diversified until all depend on the same component technology.
Who names it
| Author | What they call it / where it appears |
|---|---|
| Neumann | A Taxonomy of Moats — Risk pooling |
Note. The diagnostic and scenario are Strategy Canon’s analytical application. Test the firm’s benefit and exclusion mechanism separately; this category alone does not establish Power.