C/F/37. EQUITY PORTFOLIO MANAGEMENT: CRITICAL SUCCESS FACTORS (International Diversification, Country versus Sector Allocation)

The present study aims to examine different benefits from portfolio diversification, namely International diversification, the effects of EMU on country versus sector allocation, and the relative significance of country and industry factors in the determination and the dynamics of European returns. In particular, using a data set of portfolios consisting of 11 European countries and 10 industrial sectors, it was applied the Heston and Rouwenhorst (1994) and Griffin and Karolyi (1998). The analysis shows that the country effect is the basic determinant of heterogeneity of returns and is stronger than the industry effect. This implies that a hypothesis of European financial integration is not compatible with the information conveyed by the data. Finally, the implication for portfolio managers is that diversification benefits can be exploited by diversifying across countries.

P/F/47. Portfolio Diversification. European Diversification: across countries or across industries?

ABSTRACT:
This study examines the extent to which gains from diversification across European countries within an industry allow for greater risk reduction than industry diversification within a country. European stock markets are becoming increasingly globalised and intra-industry mergers and acquisitions are a reality as a result of the increasing economic integration of Europe, the implementation of the single currency and the elimination of restrictions in banking and financial services. Therefore, investment opportunities have increased and accelerated the flow of equity capital between European markets. Using a sample of 17 countries and 18 industries between 1992 and 2001 it is found that country diversification is a more successful method for achieving risk reduction than industry diversification.

C/F/37 EQUITY PORTFOLIO MANAGEMENT: CRITICAL SUCCESS FACTORS (International Diversification, Country versus Sector Allocation)

Abstract: The present study aims to examine different benefits from portfolio diversification, namely International diversification, the effects of EMU on country versus sector allocation, and the relative significance of country and industry factors in the determination and the dynamics of European returns. In particular, using a data set of portfolios consisting of 11 European countries and 10 industrial sectors, it was applied the Heston and Rouwenhorst (1994) and Griffin and Karolyi (1998). The analysis shows that the country effect is the basic determinant of heterogeneity of returns and is stronger than the industry effect. This implies that a hypothesis of European financial integration is not compatible with the information conveyed by the data. Finally, the implication for portfolio managers is that diversification benefits can be exploited by diversifying across countries.