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The Journal of Alternative Investments

The Journal of Alternative Investments

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Optimal Portfolios with Traditional and Alternative Investments: An Empirical Investigation

Edwin O. Fischer and Susanne Lind-Braucher
The Journal of Alternative Investments Fall 2010, 13 (2) 58-77; DOI: https://doi.org/10.3905/jai.2010.13.2.058
Edwin O. Fischer
is a professor at the Institute for Finance in Graz, Austria.
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  • For correspondence: edwin.fischer@uni-graz.at
Susanne Lind-Braucher
is an assistant professor at the Institute for Finance in Graz, Austria.
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  • For correspondence: susanne.lind-braucher@uni-graz.at
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Abstract

This article empirically investigates the diversification effects on a traditional portfolio by introducing alternative investments (hedge funds, managed futures, real estate, private equities, and commodities). The authors analyze two portfolios: the one with the lowest risk (Minimum Risk Portfolio, or MRP) and the one with the highest (modified) Sharpe Ratio (Maximum Relative Performance Portfolio, or MRPP) for the period April 1999 to April 2009. This article is the first attempt to incorporate a variety of risk measures (Volatility, Value at Risk, and Conditional Value at Risk) as the objective function for portfolio optimization and for different estimates for the expected return (historical estimates, robust Bayes-Stein estimates, Capital Asset Pricing Model (CAPM) estimates, and Black-Litterman estimates). Furthermore, the alternative risk measures are additionally modified for the skewness and the kurtosis: modified VaR and modified CVaR. The influences of the higher moments on asset allocation are also examined in connection with different risk measures and various estimators for expected returns.

TOPICS: Real assets/alternative investments/private equity, portfolio construction, VAR and use of alternative risk measures of trading risk, statistical methods

  • Copyright © 2010 Karl-Franzens-Universität Graz. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Alternative Investments: 13 (2)
The Journal of Alternative Investments
Vol. 13, Issue 2
Fall 2010
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Optimal Portfolios with Traditional and Alternative Investments: An Empirical Investigation
Edwin O. Fischer, Susanne Lind-Braucher
The Journal of Alternative Investments Sep 2010, 13 (2) 58-77; DOI: 10.3905/jai.2010.13.2.058

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Optimal Portfolios with Traditional and Alternative Investments: An Empirical Investigation
Edwin O. Fischer, Susanne Lind-Braucher
The Journal of Alternative Investments Sep 2010, 13 (2) 58-77; DOI: 10.3905/jai.2010.13.2.058
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  • Article
    • Abstract
    • DATABASE AND ANALYSIS
    • ASSET ALLOCATION
    • ALTERNATIVE ESTIMATORS FOR EXPECTED RETURNS
    • ALTERNATIVE RISK AND PERFORMANCE MEASURES
    • EFFICIENT FRONTIERS
    • ANALYSIS OF THE MINIMUM RISK PORTFOLIOS
    • ANALYSIS OF THE MAXIMUM RELATIVE PERFORMANCE PORTFOLIOS (MRPP)
    • SOME FINAL REMARKS
    • CONCLUSION
    • APPENDIX
    • REFERENCES
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