Geographical Diversification

AAA

DEFINITION of 'Geographical Diversification'

The practice of diversifying an investment portfolio across different geographic regions so as to reduce the overall risk and improve returns on the portfolio. The term also refers to the strategy employed by large companies of locating their operations in different regions or countries in order to reduce business and operational risk.

INVESTOPEDIA EXPLAINS 'Geographical Diversification'

As with diversification in general, geographical diversification is based on the premise that financial markets in different parts of the world may not be highly correlated with one another. For example, if the US and European stock markets are declining because their economies are in a recession, an investor may choose to allocate part of his portfolio to emerging economies with higher growth rates such as China, Brazil and India.


Most large multinational corporations also have a high degree of geographic diversification. This enables them to reduce expenses by locating plants in low-cost jurisdictions and also lowers the effect of currency volatility on their financial statements. In addition, geographic diversification may have a positive impact on a corporation's revenues, since high-growth regions may offset the effects of lower-growth regions.

RELATED TERMS
  1. Asset Allocation

    An investment strategy that aims to balance risk and reward by ...
  2. Country Risk

    A collection of risks associated with investing in a foreign ...
  3. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments ...
  5. Currency Risk

    A form of risk that arises from the change in price of one currency ...
  6. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
Related Articles
  1. Broadening Your Portfolio's Borders
    Investing Basics

    Broadening Your Portfolio's Borders

  2. Evaluating Country Risk For International ...
    Options & Futures

    Evaluating Country Risk For International ...

  3. Getting Into International Investing ...
    Mutual Funds & ETFs

    Getting Into International Investing ...

  4. When Geographic Diversification Fails
    Active Trading

    When Geographic Diversification Fails

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center