This study examines the effect of activity diversification on bank holding company risk. Banks increasingly are branching into financial services such as security underwriting and insurance. Critics of policies that extend bank powers argue that banks increase their risk through activity diversification. Modern portfolio theory predicts that increased diversification results in lower overall risk if nonbank activities are uncorrelated with banking. This study uses market-based data and several risk measures to address this question. The results of this study support the predictions of portfolio theory. Increases in diversification result in diminishing marginal decreases in risk. Diversification does not appear to have an important effect on measures of systematic risk.