Abstract
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.
Highlights
Using an empirical analysis, this study identifies the segmentation criterion most suited to the implementation of risk-based portfolio construction strategies in the “equity” asset class.The investment process in a top-down approach starts with the division of the investment universe into different asset classes, with each asset class representing a set of financial assets characterized by high similarity in terms of their risk-return combination
Our comparative analysis provides substantially coherent results, demonstrating a significant preference for the sectorial criterion compared to the geographic one. 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
Descriptive statistics global minimum variance and maximum diversification approaches, the equal weighting and optimal of the data sample risk parity approaches guarantee that the entire in- Regarding the alternative criteria for segmentavestment universe is always included in the portfo- tion of the global stock market, represented by the lio selected by the investor (Clark et al, 2013)
Summary
This study identifies the segmentation criterion most suited to the implementation of risk-based portfolio construction strategies in the “equity” asset class. External differentiation requires that different asset classes have distinct exposures to sources of systematic risk, such as macroeconomic and political factors (Basile & Ferrari, 2016). Sectorial criteria are based on the assumption that securities of firms in the same industry move in a similar way, since the company’s industry determines the degree of sensitivity to macroeconomic and political factors. These factors include technological advancements and the consequent changes in production processes, the competitive structure of the market, economies of scale and infrastructural needs, the evolution of consumer preferences, the dynamics of the global economic cycle, and the commodities market. This paper is divided into three sections: the first provides a review of the literature on risk-based strategies; the second explains the methodology of the analysis and the chosen sample; and the third focuses on measurement and interpretation of the results
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