PORTFOLIO ASSET ALLOCATION PROCESS: INTERNATIONAL DIVERSIFICATION BY COUNTRY OR BY SECTOR? Available to Purchase

Employing cluster analysis techniques, the paper examines the efficacy of international diversification across economic sectors, or the so‐called “bottom‐up approach,” as contrasted with the traditional approach used by fund managers of allocating assets by country and then by sector. The study covered the 1986–93 period and examined data for seven economic sectors in 20 countries divided into three regional groupings (North America, Pacific Rim, and Europe). The findings are portrayed in dendograms which depict the correlation coefficients between sector pairings. The statistical evidence suggests that the market sector approach has a great deal of merit as a basis for international portfolio diversification.