|Research Paper 113|
|Geographic Versus Industry Diversification: Contraints Matter|
EHLING - Penn State University, Smeal College
Sofia B. RAMOS - ISCTE Business School
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research addresses whether geographic diversification provides benefits over industry diversification
in a sample of European country and industry indexes. The methodology allows performance comparisons
with short-selling constraints, upper and lower bounds, and many benchmarks. In the absence of constraints,
no empirical evidence is found to support the argument that country diversification is a superior approach.
In the case of realistic weights on portfolios such as short-selling, and lower or upper bonds, geographic
diversification performs (sig-nificantly) better. The contrary results appear to be attributable to
the fact that industry portfolios are better suited to eliminate the single dominant factor risk in
stock returns. Further out-of-sample analysis shows that geographic diversification performs better,
although the tests do not show statistical significance.