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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. [1] Diversification is used as a strategy to encourage positive economic growth and development. [ 2 ]
Economies of scope make product diversification efficient, as part of the Ansoff Matrix, if they are based on the common and recurrent use of proprietary know-how or on an indivisible physical asset. [7] For example, as the number of products promoted is increased, more people can be reached per unit of money spent.
The simplest example of diversification is provided by the proverb "Don't put all your eggs in one basket". Dropping the basket will break all the eggs. Placing each egg in a different basket is more diversified. There is more risk of losing one egg, but less risk of losing all of them. On the other hand, having a lot of baskets may increase costs.
For example, some crops are more drought-resistant than others, but may offer poorer economic returns. A diversified portfolio of products should ensure that farmers do not suffer complete ruin when the weather is bad. Similarly, diversification can manage price risk, on the assumption that not all products will suffer low prices at the same time.
Diversification may allow for the same portfolio expected return with reduced risk. The mean-variance framework for constructing optimal investment portfolios was first posited by Markowitz and has since been reinforced and improved by other economists and mathematicians who went on to account for the limitations of the framework.
Example investment portfolio with a diverse asset allocation. Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame. [1]
For example, let’s say you have 10 investments of $10,000 each in various companies. The first five companies you invest in each provide a $500 dividend yield. The next two companies provide a ...
The theory also focuses on positive externalities and spillover effects of a knowledge-based economy which will lead to economic development. The endogenous growth theory primarily holds that the long run growth rate of an economy depends on policy measures.