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Geographical versus Industrial Diversification: A Mean Variance Spanning Approach

Author

Listed:
  • Paul EHLING

    (HEC-University of Lausanne and FAME)

  • Sofia B. RAMOS

    (HEC-University of Lausanne, FAME and CEMAF/ISCTE)

Abstract

This paper addresses whether country allocation provides benefits over industry allocation in a sample of European country and industry indexes. Strategy performance is compared using a mean-variance spanning test. We find that, for investors with low risk aversion, industry allocation is as good as investing in the complete set of assets. Moreover, in the most recent subperiod coinciding with the inception of the Euro, country and industry diversification are both effective. By contrast, investors with high risk aversion should always mix country and industry portfolios. A striking aspect of our analysis is that we do not find empirical evidence to support the argument that country diversification is a superior approach.

Suggested Citation

  • Paul EHLING & Sofia B. RAMOS, 2003. "Geographical versus Industrial Diversification: A Mean Variance Spanning Approach," FAME Research Paper Series rp80, International Center for Financial Asset Management and Engineering.
    • Handle: RePEc:fam:rpseri:rp80
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    File URL: http://www.swissfinanceinstitute.ch/rp80.pdf
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    References listed on IDEAS

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    Cited by:

    1. Moerman, Gerard A., 2008. "Diversification in euro area stock markets: Country versus industry," Journal of International Money and Finance, Elsevier, vol. 27(7), pages 1122-1134, November.

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    More about this item

    Keywords

    Diversification gains; EMU; mean-variance spanning; portfolio allocation strategies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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