Geographical versus Industrial Diversification: A Mean Variance Spanning Approach

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.