An Index Methodology for Diversifying Business Risk

   This article introduces a novel index methodology, functional information system (FIS)-based identification of a new risk category, related business risk (R BR); a new business risk classification technology called an FIS; and a statistical methodology called stratification to effectively diversify R BRs. When two or more companies' earnings are affected by the same economic drivers, such as similar suppliers, customers, or product types, they share an R BR.
   Although traditional finance divides risk into systematic and idiosyncratic, we believe that an important third category of risks exists: those shared by companies engaged in related businesses. R BRs are different from single-company idiosyncratic risks such as management or product failures. R BRs also differ from systematic risk (e.g., market, sector and style) because they relate to underlying operating risks and not those directly reflected by market prices.