All that glitters is not gold: diversification strategies in reserve portfolio management

• Autor(a) principal: Jerónimo, Liliana Brandão
• Data de Publicação: 2012
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/5052
• topic: Risk diversification; Asset allocation; Commodities; Reserve management

Considering an investment set restricted to bond indices, this paper analyses whether adding commodities will expand the investment frontier. The case study is based on a hypothetical reserve management portfolio fully invested in the fixed income market and tries to assess whether commodities act as a natural diversifier. The approach differs from standard analysis by focusing exclusively on a EUR based investor with a preference for avoiding foreign exchange exposure. The analysis uses a database from 2000 to 2011 and applies a mean variance optimization process to the historical data. The results obtained confirmed that, under the assumptions and the database considered, the diversification results in an expansion of the efficient frontier, leading to a better risk/return profile. The outcomes stood even after some stress tests to the potential weak spots: i) seeing if it works outside the crisis period; ii) imposing a maximum tracking error vs. the original bond only portfolio and iii) varying the correlation among bonds and commodities (from original negative values to zero/positive).