The Critique of What Measures the Benefits of Diversification

Introduction The basic premise of investing is that investors like return and definitely do not like risks. In many cases, people invest in dangerous assets only if they want a higher return. Therefore, it turned out that it is important to accurately define the meaning of the term "risk" in relation to investment. For inspectors, especially financial analysts, it is important to measure risks and discuss risk-return relationships (Liang & McIntosh, 1999).

Relationships among literatures on diversification or concentration metrics The combination of ubiquitous information distinguishes our metrics from other metrics such as Herfindahl-Hirschman (1964) index and entropy (L. Jost, 2006, PP ). Saviotti and K. Frenken), 2008). Since the HH index and entropy do not contain product information, their diversification indicators are the same in two baskets of goods with the same inventory allocation. In other words, neither the HH index nor the entropy can distinguish countries exporting 10% bananas and 90% mango, 90% bananas and 10% mango, 10% motorcycles and 90% aircraft engines.

Over the past several decades, the degree of corporate diversification seems to have increased significantly. Entropy is one of the ways that has been used for over 20 years (Sankaran P. Raghunathan, 1995). Recently, entropy metrics proved to be more effective than other measures of enterprise diversification (Hoskisson, Hitt, Johnson & Moesel, 1993). According to the theory of market imperfections and transaction costs, the ability to earn profits through intangible assets and minimize management costs depends on differences and similarities in the countries in which they operate. Vachani, 1991). The relevant geographic units have close similarities in demand fluctuations, patterns of external constraints, and general economic conditions.