Discussion
The __________ exaggerates the differences between focused and diversified firms
Answer: C
Correct answer: Herfindahl Index (HI)
The Herfindahl index sums the squares of the shares, so it weights large segments far more heavily than small ones. A firm with one dominant business and several small ones therefore scores close to a single-segment firm, while a genuinely diversified firm scores much lower, and the gap between the two is wider than the underlying difference in diversification. That squaring is what exaggerates the contrast.
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