Abstract
The work of Markowitz in the early 1950s triggered a revolution in the investment management world. The concept of efficient portfolios and efficient frontier gave an important impulse to the development of modern finance. Ever since, the concept of efficient portfolios has been widely applied in many environments. While originally restricted to stock markets, applications have been developed in the field of e.g. the optimisation of energy distribution (Letzelter 2005). In the last decade, asset managers look at the opportunity to improve their expected return-risk trade off by adding commodities to their portfolio of stocks and bonds. In this chapter we look at the contribution of oil to such a portfolio. The goal of this paper is to investigate if the addition of oil to an investment portfolio can improve an efficient set of traditional investments in stocks and bonds. We believe that given the counter cyclicality of oil returns compared to the stock market, that the inclusion of such assets should improve the risk-return trade-off. It appears that oil is not a safe haven for stockholders and bondholders. Oil is not a hedge for stockholders, but it does present a hedge for bondholders. When adding oil to the portfolio we see a change in efficient frontier and market portfolio. Holders of portfolios of bonds and stocks can improve their risk-return trade off by enlarging their portfolio with an investment in oil.
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Notes
- 1.
Another commodity is real estate. For example Chua (1999) studied the role of international real estate in a mixed-asset portfolio while attempting to control for higher taxes, transaction costs and asset management fees incurred when investing in real estate, as well as the appraisal smoothing in real estate return indices.
- 2.
In 2005 Goldman Sachs defined The Next Eleven (or N-11). The N-11 are eleven countries—Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam—identified by Goldman Sachs investment bank as having a high potential of becoming, along with the BRICs, the world's largest economies in the twenty first century. O’Neill (2001)
- 3.
The values found for R 2 are irrelevant for Eq. (11.3) since the function is only locally linear and not globally. Calculating the adjusted R only makes sense when the function is linear over the whole domain of variables.
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Dorsman, A., Koch, A., Jager, M., Thibeault, A. (2013). Adding Oil to a Portfolio of Stocks and Bonds?. In: Dorsman, A., Simpson, J., Westerman, W. (eds) Energy Economics and Financial Markets. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-30601-3_11
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