The impact of sectorial and geographical segmentation on risk-based asset allocation techniques

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In the last decades, risk-based portfolio construction techniques have enjoyed a widespread diffusion in the financial community. This study aims at evaluating how these portfolio construction techniques produce different results depending on whether the segmentation of the stock market investment universe is based on sectorial or geographical criteria. An empirical analysis, applied on the global equity market, is carried out by making use of the typical and most advanced statistical and financial evaluation measures. Geographical segmentation is carried out in relation to the listing market, while sectorial segmentation is made in relation to the productive sectors to which individual companies belong. Our comparative analysis provides substantially coherent results, demonstrating a significant preference for the sectorial criterion compared to the geographic one. In conclusion, this result can be attributed to the subdivision of the investment universe into sectorial indices characterized by greater internal coherence and better external differentiation, in addition to the lower concentration of sectorial segmentation compared to the geographical one.

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    • Table 1. Weights of the sectorial and geographic segmentation of the MSCI ACWI
    • Table 2. Descriptive statistics of the benchmarks’ excess returns
    • Table 3. The correlation matrix of the sectorial benchmarks’ excess returns
    • Table 4. The correlation matrix of the geographic benchmarks’ excess returns
    • Table 5. Tests of deviations from normality of the benchmarks’ excess returns
    • Table 6. Descriptive statistics of the portfolios’ excess returns
    • Table 7. Tests of deviations from normality for portfolios’ excess returns
    • Table 8. The risk-adjusted performance of the risk-based portfolios