Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds

Nuria Bajo Davó, Carmen Mendoza Resco and Manuel Monjas Barroso
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Nuria Bajo Davó: Universidad Autónoma de Madrid, Facultad de Ciencias Económicas y Empresariales, Cantoblanco 28049, Spain.
Carmen Mendoza Resco: Universidad Autónoma de Madrid, Facultad de Ciencias Económicas y Empresariales, Cantoblanco 28049, Spain.
Manuel Monjas Barroso: Universidad Autónoma de Madrid, Facultad de Ciencias Económicas y Empresariales, Cantoblanco 28049, Spain.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2013, vol. 38, issue 1, 22-42

Abstract: This article examines the formation of efficient portfolios using mutual funds that invest in life settlements in combination with fixed-income and equity index funds. We investigate the optimal weighting of these assets and their contribution to performance and portfolio risk. We find a significant negative correlation between the selected life settlement funds and certain U.S. and European fixed-income and equity funds. Furthermore, these correlations are lower than the correlations between the index funds that replicate each other. These results suggest that life settlement funds are an appropriate financial instrument to achieve greater diversification for a portfolio made up of a fund of funds and to improve fund performance as they provide a fixed return with a lower level of risk.

Date: 2013
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