It has been three months since your promotion to assistant financial manager at fashion company RR Ltd. RR Ltd is a fashion retailer listed on the AIM market. The firm was founded 10 years ago, after a short and successful period as a partnership between Rebecca and Roy Race. The company has grown rapidly and has two successful own brand labels, RR catering for the middle-income womans market and Racey aimed at younger women.

RR Ltd distributes its two major seasonal lines (spring/summer and autumn/winter) under the RR label and its young womens label Racey through major high street retailers in the UK and United States. Sales are also generated through exhibits of new collections at clothing exhibitions and through a fledgling, but not dynamic online presence, and very occasional webcast fashion shows.

Task 1

RR Ltd has recently established a private pension scheme for its employees and the financial manager has asked you to provide a short report on why diversification generally leads to a reduction in risk relative to return. This report will be made available on the company website to inform employees on how the pension scheme manages both risk and return when selecting investable assets (including reference to forms of risk, covariance and CAPM).