Diversification in Business Valuation

Blatter Anja Bettina (), Ernst Dietmar and Lang Sarah Maria
Additional contact information
Blatter Anja Bettina: Quantitative Methods in Finance, Nürtingen University of Applied Science, Nürtingen, Germany
Ernst Dietmar: International Finance, Nürtingen University of Applied Science, Nürtingen, Germany
Lang Sarah Maria: TU Bergakademie University of Freiberg, Freiberg, Germany

Journal of Business Valuation and Economic Loss Analysis, 2025, vol. 20, issue 1, 1-28

Abstract: The importance of the diversification and the related diversification factor in business valuation has not been studied in depth. In CAPM, due to the model assumptions, it is implied that an investor holds a perfectly diversified portfolio, which answers the question of diversification. The objective of this paper is to clarify the definition of diversification and to show how diversification effects can be incorporated into business valuation. Our research contribution entails demonstrating methods to capture the risk situation of an investor based on its asset allocation and then deriving the diversification effect from this assessment. As a methodological approach, we have opted for one that encompasses the most diverse degrees of diversification. Our analysis shows that this approach captures all non-hedged risks and thus performs a stand-alone valuation without diversification effects. If the diversification effect of a specific portfolio is to be included in the valuation, the analyst must shift from a stand-alone approach to a portfolio based approach, where the diversification factor cannot simply be equated with the correlation coefficient but must be calculated using various aggregation methods. Given that the conventional variance-covariance method excludes extreme risks, we propose the use of the copula approach. This approach can enhance risk modeling and yield more accurate results in diversification effect calculations. Our analysis demonstrates that it is possible to effectively model different diversification effects in business valuation. However, this entails substantial data expenses and demands a high degree of methodological expertise from the analyst.

Keywords: CAPM; corporate risk-based business valuation; copula; diversification effect; diversification factor; risk management (search for similar items in EconPapers)
JEL-codes: C63 G11 G17 G32 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/jbvela-2024-0024 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:jbvela:v:20:y:2025:i:1:p:1-28:n:1002

Ordering information: This journal article can be ordered from
https://www.degruyte ... rnal/key/jbvela/html

DOI: 10.1515/jbvela-2024-0024

Access Statistics for this article

Journal of Business Valuation and Economic Loss Analysis is currently edited by Bradley T. Ewing and James J. Hoffman

More articles in Journal of Business Valuation and Economic Loss Analysis from De Gruyter
Bibliographic data for series maintained by Peter Golla ().