Risks and Rewards Paper
Diversification plays a vital role in the economy of our nation. This paper will provide an example of a well-diversified country versus a poorly diversified country. Nations invest in a variety of financial risks to ensure the security of its investment. Diversification can involve investing in a variety of stocks as well as a variety of bonds.
“A portfolio strategy designed to reduce exposure to risk by combining a variety of investments, such as stocks, bonds, and real estate, which are unlikely to all move in the same direction. The goal of diversification is to reduce the risk in a portfolio.” (2008). In a perfect world, a diversified portfolio would receive returns on all of their investments, including stocks, bonds, and real estate but this is the game all investors make when trying to predict which investments will be successful. It is understood that increased diversification leads to higher levels of economic stability and performance. For example, a well-diversified country would not sink all of their investments into just one type. Putting all of their monies into stocks would not be a good risk. The stock market is too volatile and unpredictable. One could lose everything they have invested for many reason. It is amazing to see how stocks can be affected by a war or even new legislation. The investor is also wise for investing in many different stock options. Keeping it broad helps reduce the exposure to high risks. There are many different indicators used to make these decisions.
Some argue that there is a limit to which a small economy can diversify since some countries cannot have too many activities or niches within their economy. Unlike larger countries, small ones would simply not have the number of workers, companies or consumers that would allow enough options for a large number of economic activities to be viably pursued.
This is certainly an issue. A small economy needs to diversify into only few niches for it to achieve growth
“A portfolio strategy designed to reduce exposure to risk by combining a variety of investments, such as stocks, bonds, and real estate, which are unlikely to all move in the same direction. The goal of diversification is to reduce the risk in a portfolio.” (2008). In a perfect world, a diversified portfolio would receive returns on all of their investments, including stocks, bonds, and real estate but this is the game all investors make when trying to predict which investments will be successful. It is understood that increased diversification leads to higher levels of economic stability and performance. For example, a well-diversified country would not sink all of their investments into just one type. Putting all of their monies into stocks would not be a good risk. The stock market is too volatile and unpredictable. One could lose everything they have invested for many reason. It is amazing to see how stocks can be affected by a war or even new legislation. The investor is also wise for investing in many different stock options. Keeping it broad helps reduce the exposure to high risks. There are many different indicators used to make these decisions.
Some argue that there is a limit to which a small economy can diversify since some countries cannot have too many activities or niches within their economy. Unlike larger countries, small ones would simply not have the number of workers, companies or consumers that would allow enough options for a large number of economic activities to be viably pursued.
This is certainly an issue. A small economy needs to diversify into only few niches for it to achieve growth
References: Sowell, T. (2011). Basic Economics(4th ed.) New York, NY: Basic Books Wagner, J.E. (2008, February) Measuring Economic Diversification. Retrieved from http://www.investorwords.com/1504/diversification.html#ixzz2EhpaCNC4