MODELLING DIVERSIFICATION EFFECT OF COMBINING TRADITIONAL AND ALTERNATIVE INVESTMENTS

Abstract

The dynamic development of the market of alternative assets in the last decade opens up new opportunities for investors. This development process creates new problems related to the optimal allocation of the investor's capital between traditional and alternative assets. The article examines the economic problem of building an optimal investment portfolio by the method of specification of Markowitz's theoretical approach to the combination of these two groups of assets. As traditional assets, the paper analyzes index investments in three main US indices: S&P400, S&P500, and S&P600. These three indices represent a complete cross-section of the economy of the United States of America, as they characterize different market segments depending on capitalization. Index investments in seven main alternative indices are considered as alternative investments. This sample includes both narrow-profile indices related to investing in individual commodities, such as precious metals or oil, and related to real estate and private equity. The initial stage of the research involves a correlation analysis applied to the statistical series of index returns for the period 2015-2019. The analysis indicated the heterogeneity of the correlation dependence within the studied group. Traditional assets demonstrate a relatively high dependency of returns on each other. At the same time, alternative assets show a low level of dependence both among themselves and with traditional assets. Within the application of the Markowitz approach, the task of finding the optimal portfolio was structured into the construction and analysis of three efficient sets. The first two effective sets, corresponding to traditional and alternative assets, visualize the potential of the combination of assets in terms of risk minimization. On this basis, an optimal portfolio is built from a combination of alternative and traditional assets. Comparative analysis of optimal portfolios demonstrated that risk indicators for the combined portfolio have better values. The K-ratio indicator showed a greater degree of stability of the profitability of the combined portfolio with minimal risk.