Geographical Diversification

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.

BREAKING DOWN '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. Regional Fund

    A mutual fund that confines itself to investments in securities ...
  2. Eurozone

    A geographic and economic region that consists of all the European ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments ...
  4. Geographical Pricing

    Adjusting an item's sale price based on the buyer's location. ...
  5. Europe, Australasia, Far East - ...

    An acronym referring to the geographical area that includes these ...
  6. Diversity Score

    A measure, created by Moody's Investors Service, to estimate ...
Related Articles
  1. Investing Basics

    Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons

    Examine the relative advantages and disadvantages of utilizing either a concentrated or a diversified investment portfolio strategy.
  2. Investing Basics

    Portfolio Diversification, Done Right

    Diversifying your portfolio by means of different securities and asset classes is an essential approach to lower the overall risk of a portfolio.
  3. Bonds & Fixed Income

    The Importance Of Diversification

    Without this risk-reduction technique, your chance of loss will be unnecessarily high.
  4. Insurance

    The Dangers Of Over-Diversifying Your Portfolio

    If you diversify too much, you might not lose much, but you won't gain much either.
  5. Retirement

    Risk and Diversification: Diversifying Your Portfolio

    With the stock markets bouncing up and down 5% every week, individual investors clearly need a safety net. Diversification can work this way and can prevent your entire portfolio from losing ...
  6. Trading Strategies

    1. Better Diversification

    We provide 10 reasons why adding ETFs to your portfolio can trump securities-only portfolio management strategies.
  7. Investing Basics

    Introduction To Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  8. Investing Basics

    Diversification Beyond Stocks

    If you think holding several stocks means you're diversified, think again - there's much more to be done to reduce portfolio risk.
  9. Options & Futures

    Financial Concepts: Diversification

    Many individual investors can't tolerate the short-term fluctuations in the stock market. Diversifying your portfolio is the best way to smooth out the ride. Diversification is a risk-management ...
  10. Financial Advisors

    How to Help Clients See Value of Diversification

    One of an advisor’s most important jobs is getting clients to understand the value of diversification. Here are some tips that will help.
RELATED FAQS
  1. What percentage of a diversified portfolio should large cap stocks comprise?

    Learn more about achieving optimal diversification of an investment portfolio, and specifically about the percentage of large-cap ... Read Answer >>
  2. What is the difference between diversification and hedging?

    Learn what diversification and a hedge are, how investors can diversify and hedge their investments, and the main difference ... Read Answer >>
  3. Is there a difference in risk between the different regions of the U.S. banks?

    Find out why there are different amounts of risk for different regional banks in the US. It depends on regional exposure ... Read Answer >>
  4. How does market risk differ from specific risk?

    Learn about market risk, specific risk, hedging and diversification, and how the market risk of assets differs from the specific ... Read Answer >>
  5. How do investment advisors calculate how much diversification their portfolios need?

    Learn how modern portfolio theory (MPT) can help determine a diversified mix of assets for inclusion in a portfolio that ... Read Answer >>
  6. How are negative correlations used in risk management?

    Learn about risk management and how negative correlations between assets are used to diversify and hedge risk associated ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center