Does Diversification Increase or Decrease Bank Risk and Performance? Evidence on Diversification and the Risk-Return Tradeoff in Banking

Using a sample of bank-years from 2005 to 2017, we examine the effect of internal control quality on future risk-taking and performance. We find that banks that disclose a material weakness in internal controls have higher risk-taking and worse performance in the future, including having a higher (lower) likelihood of experiencing large losses (gains). These findings suggest that weak controls increase (reduce) downside (upside) risk-taking or conversely that strong controls increase (reduce) upside (downside) risk-taking. Path analyses suggest that 22.3 to 43.7 percent of the effect of internal control quality on future performance is through risk-taking. Additionally, material weaknesses are negatively associated with total asset, loan, interest income, and non-interest income growth, suggesting that internal control quality affects both core and non-core activities of banks. Overall, results suggest that strong internal controls improve bank risk-taking, in part through asymmetrically reducing downside risk-taking while facilitating upside risk-taking, ultimately improving bank performance.

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Diversification, Bank Risk and Performance: A Cross-Country Comparison

SSRN Electronic Journal ◽

10.2139/ssrn.1013430 ◽

2006 ◽

Cited By ~ 1

Author(s):

Jarrett Emory Kotrozo ◽

Sungho Choi

Keyword(s):

Bank Risk ◽

Country Comparison ◽

Cross Country ◽

And Performance

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Risk-return analysis of the investment portfolio of two stocks, under the Markowitz model. Case study: Two multinational companies listed on the Mexican Stock Exchange

Journal General Economics ◽

10.35429/jge.2020.7.4.21.27 ◽

2020 ◽

pp. 21-27

Author(s):

María Trinidad ALVAREZ-MEDINA

Keyword(s):

Stock Exchange ◽

Industrial Sector ◽

Financial Assets ◽

Investment Portfolio ◽

Model Case ◽

Risk Return ◽

Economic Entity ◽

Food And Beverage ◽

And Performance

Investment in productive and financial assets are a decision made as an alternative to direct resources to bring greater value and higher performance to an economic entity. The objective of this article is to analyze the return risk of the stocks of two companies listed on the Mexican Stock Exchange (BMV), presenting the case of the companies Grupo Bimbo, SAB de CV, and GRUMA, SAB de CV, both companies listed on the Mexican Stock Exchange, belonging to the industrial sector specifically the food and beverage sub-sector, being the most representative companies of this sector. The return on the portfolio is 0.27256% and the risk is 0.0121862, with an investment of 50% in each of them. The period analyzed was from 2015 to 2018. It is important to base decision-making by considering the risk analysis and performance of financial assets in where you wish to invest, in addition to relying on other analyzes such as fundamental and technical analysis, among others.

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