PR - RATES OF RETURN AND RISK FOR INVESTMENT WITH LATERAL DIVERSIFICATION VS. SPECIALIZATION

Abstract:

To reduce risks, diversification is recommended in economic science. This is in contrast to investment activities of farmers who often specialize. In this article the trade-offs of the two expansion strategies, diversification vs. specialization, are shown. Investments of the same size and the same initial profitability are compared for both strategies, diversification vs. specialization. Using the Monte Carlo simulation method, the risk of investment is simulated with a cash flow model applying triangular distributed input variables. The different alternatives are to be assessed in terms of equity development as a measure for profitability and by the standard deviation as a measure of risk. The profitability advantages between the two growth strategies presented do not necessarily occur on the side of diversification because due to economies of scale at certain levels, specialization is recommended.

Keywords: Structural change, investment, diversification, specialization, profitability, risk.