Economic diversification is the process of shifting an economy away from a single income source toward multiple sources from a growing range of sectors and markets. Traditionally, it has been applied as a strategy to encourage positive economic growth and development.
What are the five diffenition of Economics?
There are five basic principles of economics that explain the way our world handles money and decides which investments are worthwhile and which ones aren't: opportunity cost, marginal principle, law of diminishing returns, principle of voluntary returns and real/nominal principle.
How big are the benefits of economic diversification?
- Enhancing the effectiveness of spatially-targeted efforts to support regional economic development
- Coordinate transport improvements with urban and land development; and
- Differentiate priorities for policy and investment along sub-national regional lines, with a careful identification and consideration of local challenges and opportunities.
What are the advantages of economic diversification?
- Diversification can help manage risk.
- You may avoid costly mistakes by adopting a risk level you can live with.
- Rebalancing is a key to maintaining risk levels over time.
What's 'indifference principle' in economics?
What's 'indifference principle' in Economics - The Hindu This refers to the proposition that unless people are special in some way, nothing can make them happier than the next best alternative. So, when they have to choose between two different choices, peo
What is an example of economic diversification?
Chile is an example of a diversified economy, exporting more than 2,800 distinct products to more than 120 different countries. Zambia, a country similarly endowed with copper resources, exports just over 700 products — one-fourth of Chile's export basket — and these go to just 80 countries.
What does diversification mean in simple terms?
1 : the act or process of diversifying something or of becoming diversified : an increase in the variety or diversity of something Between the appearance of complex cells 2.1 billion to 1.6 billion years ago and the explosive diversification of multicellular animals some 800 million years ago, not much happens in the ...
What is diversification with example?
Conglomerate diversification refers to the development of new products that are unrelated to your original lines. For example, your t-shirt company has now decided to start stocking apple products.
Why is diversification important?
Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximize return by investing in different areas that should each react differently to changes in market conditions.
What are the two types of diversification?
There are three types of diversification techniques:Concentric diversification. Concentric diversification involves adding similar products or services to the existing business. ... Horizontal diversification. ... Conglomerate diversification.
What is the best example of diversification?
Apple. One of the most famous companies in the world, Apple Inc. is perhaps the greatest example of a “related diversification” model. Related diversification means there are notable commonalities between the existing products and services, and the new ones being developed.
Which of these is a good example of diversification?
1) Which of the following is an example of diversification : The correct answer is e) Market expansion.
What is diversification in business?
Related diversification occurs when a firm moves into a new industry that has important similarities with the firm's existing industry or industries (Figure 8.1). Because films and television are both aspects of entertainment, Disney's purchase of ABC is an example of related diversification.
What is a synonym for diversification?
In this page you can discover 21 synonyms, antonyms, idiomatic expressions, and related words for diversification, like: diverseness, diversity, heterogeneity, variegation, heterogeneousness, multiformity, variety, variousness, job-creation, multifariousness and miscellaneousness.
What is the definition of diversification quizlet?
Define diversification. Diversification refers to the expansion of an existing firm into another product line or market. It may be related or unrelated. It allows firms to expand their product lines and operating in several different economic markets.
Is diversification good or bad?
Diversification can lead into poor performance, more risk and higher investment fees! The word “diversification” usually makes investors feel safe. But, does it give a false sense of security and lead to investment mistakes? It's hard to argue with the common sense behind diversification within the investment process.
Definition of diversification
1 : the act or process of diversifying something or of becoming diversified : an increase in the variety or diversity of something Between the appearance of complex cells 2.1 billion to 1.6 billion years ago and the explosive diversification of multicellular animals some 800 million years ago, not much happens in the fossil record.
History and Etymology for diversification
borrowed from Middle French & Medieval Latin; Middle French diversificacion, diversification, borrowed from Medieval Latin dīversificātiōn-, dīversificātiō "differentiation, variation," from dīversificāre "to differentiate, diversify " + Latin -tiōn- -tiō, suffix of verbal action
What is the ultimate goal of diversification?
The ultimate goal of diversification is to reduce the volatility. VIX The Chicago Board Options Exchange (CBOE) created the VIX (CBOE Volatility Index) to measure the 30-day expected volatility of the US stock market, sometimes called the "fear index". The VIX is based on the prices of options on the S&P 500 Index.
What is portfolio diversification?
Portfolio diversification concerns the inclusion of different investment vehicles with a variety of features. The strategy of diversification requires balancing various investments that have only a slight positive correlation with each other – or better yet, actual negative correlation. Low correlation usually means that the prices of the investments are not likely to move in the same direction.
What is ETF investment?
An investor should consider diversifying his/her portfolio based on the following specifications: Exchange Traded Fund (ETF) An Exchange Traded Fund (ETF) is a popular investment vehicle where portfolios can be more flexible and diversified across a broad range of all the available asset classes.
What is market positioning?
Market Positioning Market Positioning refers to the ability to influence consumer perception regarding a brand or product relative to competitors. The objective of market.
Does diversification affect risk?
However, diversification does not usually affect the inherent or systematic risk that applies to the financial markets as a whole. One way to think about the two basic types of risk is that one refers to the specific risks of an industry or individual firm, while the other refers to risk factors in the overall economy.
Is there consensus on the perfect amount of diversification?
There is no consensus regarding the perfect amount of diversification. In theory, an investor may continue diversifying his/her portfolio virtually infinitely, as long as there are available investments in the market that are not correlated with other investments in the portfolio.
What Are the Limitations of Diversification?
The more of an investor’s money is in one asset, the more they stand to gain if that asset skyrockets in value (and, on the other hand, the more they stand to lose if it tanks). Diversification limits both gains and losses.
How Does Diversification Mitigate Risk?
For instance, government bonds are considered extremely safe, as they carry very little default risk. That being said, government bonds usually only yield a 3–6% return each year. The S&P 500, which is composed of 500 large-cap stocks, on the other hand, returned 31.5% in 2019 and 18.4% in 2020. Back in 2008, however, the same stock index lost 48% of its value due to the financial crisis and subsequent recession.
Do Diverse Portfolios Perform Better During Recessions?
For this reason, portfolios with a higher proportion of these more stable assets are likely to sustain smaller losses than portfolios consisting primarily of stocks. That being said, it is impossible to time a recession, and keeping all of one’s money out of the equity market in case a recession is around the corner isn’t a very good investment strategy for anyone seeking to grow their wealth efficiently.
What is economic diversification?
Economic diversity or economic diversification refers to variations in the economic status or the use of a broad range of economic activities in a region or country. Diversification is used as a strategy to encourage positive economic growth and development. Research shows that more diversified economies are associated with higher levels of gross domestic product.
What are some examples of national economy diversification?
Good examples of national economy diversification are Chile, Malaysia and Brazil.
What is the purpose of diversification?
When a company reaches a certain point in its evolution, founders, investors, and executives often think about planning and implementing a growth strategy, such as diversification. Diversification strategy is one of the four main strategies for growth identified by Igor Ansoff in 1957, which enables companies to look at other markets they could tap ...
When should a company pursue a diversification strategy?
For these reasons, it is recommended that a company should only pursue a diversification strategy when the current product or current market no longer offers opportunities for further growth. It’s critical for companies to thoroughly evaluate the risks and assess the likelihood of achieving a profitable outcome before deciding to pursue diversification.
Why is diversification considered high risk?
Unlike market penetration strategy, diversification strategy is considered high risk not only because of the inherent risks associated with developing new products, but also because of the business’s lack of experience working within the new market. When a company chooses to diversify, they knowingly put themselves in a position of great uncertainty.
Why do companies diversify?
First and foremost, companies diversify to achieve greater profitability. Diversification is used by businesses to help them expand into markets and industries that they haven’t currently explored. This is achieved by adding new products, services, or features that will appeal to the customers in these new markets.
What happens when a company diversifies?
When a company chooses to diversify, they knowingly put themselves in a position of great uncertainty. Additionally, diversification often requires significant expansion of human and financial resources, which can sometimes have a detrimental effect on the allocation of resources in the core industries.
Is diversification a goldmine?
In summary, a diversification strategy can be a goldmine in terms of reach and revenue, but it comes with an element of risk. Companies should look to pursue other growth strategies first, and only consider diversification once their current product or current market no longer offers opportunities for further growth.
Is there a one strategy fits all solution for growth?
In the world of business, there’s no “one strategy fits all” solution for growth. Diversification can present itself in a variety of different forms depending on the direction a business wishes to move in, and can either be related or unrelated to the current business offering.
The Basics of Diversification
- Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction. The investing in more securities generates further diversification benefits, albeit at a drastically smaller rate. Diversification striv…
Diversification by Asset Class
- Fund managers and investors often diversify their investments across asset classes and determine what percentages of the portfolio to allocate to each. Classes can include: 1. Stocks—shares or equity in a publicly traded company 2. Bonds—government and corporate fixed-income debt instruments 3. Real estate—land, buildings, natural resources, agriculture, livestock…
Foreign Diversification
- Investors can reap further diversification benefits by investing in foreign securities because they tend to be less closely correlated with domestic ones. For example, forces depressing the U.S. economy may not affect Japan's economy in the same way. Therefore, holding Japanese stocks gives an investor a small cushion of protection against losses during an American economic do…
Diversification and The Retail Investor
- Time and budget constraints can make it difficult for noninstitutional investors—i.e., individuals—to create an adequately diversified portfolio. This challenge is a key reason why mutual fundsare so popular with retail investors. Buying shares in a mutual fund offers an inexpensive way to diversify investments. While mutual funds provide diversification across vari…
Disadvantages of Diversification
- Reduced risk, a volatility buffer: The pluses of diversification are many. However, there are drawbacks, too. The more holdings a portfolio has, the more time-consuming it can be to manage—and the more expensive, since buying and selling many different holdings incurs more transaction fees and brokerage commissions. More fundamentally, diversification's spreading-o…
Diversification and Smart Beta
- Smart beta strategiesoffer diversification by tracking underlying indices but do not necessarily weigh stocks according to their market cap. ETF managers further screen equity issues on fundamentals and rebalance portfolios according to objective analysis and not just company size. While smart beta portfolios are unmanaged, the primary goal becomes outperformance of the in…
Real World Example
- Say an aggressive investorwho can assume a higher level of risk, wishes to construct a portfolio composed of Japanese equities, Australian bonds, and cotton futures. He can purchase stakes in the iShares MSCI Japan ETF, the Vanguard Australian Government Bond Index ETF, and the iPath Bloomberg Cotton Subindex Total Return ETN, for example. With this mix of ETF shares, due to t…
Diversification and Unsystematic Risk
- Diversification is primarily used to eliminate or smooth unsystematic risk. Unsystematic riskis a firm-specific risk that affects only one company or a small group of companies. Therefore, when a portfolio is well-diversified, investments with a strong performance compensate for the negative results from poorly performing investments. However, diversification does not usually affect th…
Portfolio Diversification
- Portfolio diversification concerns the inclusion of different investment vehicleswith a variety of features. The strategy of diversification requires balancing various investments that have only a slight positive correlation with each other – or better yet, actual negative correlation. Low correlation usually means that the prices of the investment...
Additional Resources
- Thank you for reading CFI’s guide to Diversification. To learn more about related topics, check out the following CFI resources: 1. Corporate Strategy 2. Industry Analysis 3. Market Positioning 4. Strategic Alliances