Explain the relationship between diversification and performance

What will be an ideal response?

The relationship between diversification and performance takes the form of an inverted U (?). At the median level
of diversification, performance is much higher than at low levels of diversification (twenty-fifth percentile) or high
levels of diversification (seventy-fifth percentile). These findings tell us that, on average, although diversification
seems to benefit shareholders up to a point, it begins to dissipate value at high levels of diversification. Moderate
values are typically achieved by firms that are active in several businesses that are somewhat related to each other.
When examining the relationship between diversification and performance, it is important to understand that there
are exceptions to these averages. Some highly diversified firms perform quite well. High levels of diversification,
such as the conglomerate firm, can be very effective strategies in countries with developing capital markets. When
capital markets are not as efficient as they are in developed countries, diversified firms can internally generate
lower costs of capital than they can obtain in capital markets. Consequently, it can be efficient for firms to diversify
and own more businesses than would be efficient in countries such as the United States, the United Kingdom, or
Germany.