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What is the optimal weight for gold in a portfolio?

  • S.I.: Networks and Risk Management
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Abstract

We show that the statistical properties of gold are negatively correlated with equities and that including gold in a portfolio will provide diversification benefits. As there is no consensus on the proportion of gold that should be included in a strategic portfolio allocation we propose a visual tool that associates a performance metric with a range of possible asset weighting schemes—a Sharpe ratio response surface. This very surface shows that a target performance metric can be achieved with a large number of different allocations. We further argue that the rebalancing approach based on the surface closest to the benchmark surface under the Hausdorrf distance metric should be selected. Using a data sample between 1990 and 2018, we find that annual rebalancing with a 44-week lookback period achieves the minimum distance from the benchmark surface.

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Notes

  1. The ‘directional’ Hausdorff distance (dhd) between two sets of points, P and Q is defined as: dhd(P,Q) = max p in P [ min q in Q [ \(\Vert \)p-q\(\Vert \) ] ].

    Intuitively dhd finds the point p from the set P that is farthest from any point in Q and measures the distance from p to its nearest neighbour in Q. The Hausdorff Distance is defined as max(dhd(P,Q),dhd(Q,P)).

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Correspondence to Brian M. Lucey.

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Lucey, B.M., Peat, M., Šević, A. et al. What is the optimal weight for gold in a portfolio?. Ann Oper Res 297, 277–291 (2021). https://doi.org/10.1007/s10479-019-03496-5

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  • DOI: https://doi.org/10.1007/s10479-019-03496-5

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