Firm-level geographic sales analysis in international equity portfolio diversification'

Abstract

Recent research has shown a decrease in the benefits of international diversification for developed market equities and finds that diversifying an equity portfolio across countries offers a lower potential for risk-reduction than it did in the past. Researchers propose equity investors looking for international diversification benefits should now consider emerging markets, frontier markets or different equity-linked products, disregarding the fact that many fund managers are restricted to investing only in developed market equities. However, most previous studies in this area focus on international diversification without significant emphasis on geographic diversification, the multinational location of economic activity of the underlying equities. I make this distinction and attempt to show that a renewed focus on geographic diversification can improve the international diversification benefits available to developed market investors.