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Combining two or more risky projects, with returns which are not perfectly correlated. The expected sum of the returns to such projects is less dispersed than the expected returns on the separate projects. Insurance companies work by pooling the risks on a number of separate projects, for example the chance that any one of many houses will catch fire. Risk pooling also applies to portfolios of investment and unit trusts, which hold a number of different shares whose behaviour is at least partly independent. Risk pooling is one source of advantage for larger organizations relative to smaller ones.
Reference: Oxford Press Dictonary of Economics, 5th edt.
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