Geographic versus Industry Diversification : Constraints Matter

These research addressess whether geographic diserfication provides benefits over industry diversification in a sample of European country and industry indexes.The methodology allows performance comparison with short-slling constraints, upper and lower bounds, and many bechmarks. 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 upper and lower bounds, geographic diversification performs (siginificantly) better. The contrary results appear to be attributable to the fact that industry portfolios are better suited to to eliminate the single dominant factor risk in stock returns. Further out-of-sample analysis shows that geographic diversification performs better, although the test do not show statistical significance.