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diversification

A risk control technique that spreads loss exposures over a myriad of projects, products, areas, or markets. This technique is important since financial returns from various enterprises are not always directly correlated, so that when one activity has low returns, other activities likely would have higher returns. For example, many crop farms in the Midwest produce both soybeans and corn. By producing both crops rather than just one, the farm is less at risk of experiencing extreme fluctuations in revenues since the market prices of the two crops do not always move in the same manner. In one year, for example, low soybean yields and revenues may be counterbalanced by relatively high corn yields. An example of financial diversification is investing in a combination of stocks, bonds, and treasury bills to reduce overall financial risk. See also Segregation.


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