Gold as Part of an Investment Portfolio

Katarzyna Mamcarz
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Katarzyna Mamcarz: Maria Curie Sklodowska University, Poland

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Abstract: The goal of the article is to assess the role of gold as a component of the investment portfolio. The constructed two-component portfolios were assessed: minimum variance portfolios and optimal portfolios. Every portfolio contains gold combined with one of the three classes of assets: stocks, commodities/raw materials, and real estate represented by the S&P500 stock index, the TR/J CRB Index, and the WILREIT Index respectively. Minimum variance portfolios were constructed according to the two-asset portfolio theory, and optimal portfolios – using the Sharpe ratio. Minimum variance portfolios contain different percentages of gold, i.e. ranging from 49.0% (TR/J CRB Index and gold) to 64.0% (WILREIT Index and gold). The diversification effect as an increase in the expected rate of return with the simultaneous reduction of risk level occurs only in the case of the portfolio (TR/J CRB Index and gold). Optimal portfolios are characterized by the following percentage of gold: the TR/J CRB Index and gold (100.0%), S&P500 Index and gold (34.0%), WILREIT Index and gold (0.0%). The first is a one-component portfolio, in which gold is a ‘perfect’ substitute for investments in commodities. The last one is also a one-component portfolio containing real estate only. The original character of investigations consists in attempting to find an answer to the question: what is the role of gold as a component of investment portfolios in the periods of uncertainty in many asset markets?

Keywords: finance; diversification; gold portfolio; minimum variance portfolio; optimal portfolio; correlation coefficient; Sharpe ratio (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:tkp:mklp15:153-160

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