Risk and Income Tradeoffs in Regional Policy: A Portfolio Theoretic Approach*

Policy makers often try to raise a region's income by altering its industrial mix. However, such attempts to increase local income may have an adverse effect on the stability of the region's economy. In this paper, we develop single‐, aggregate‐, and multiregional portfolio models that can be used by policy makers to generate frontiers of risk/income‐efficient industrial mixtures for a regional economy. These portfolio models are modified for application to the tourist industry in six regions of Spain. In practice, we find that the introduction of bounds on the magnitude of sector rebalancing has a major effect on the model solutions.