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Master thesis presentation
Transcript of Master thesis presentation
Test for the Gold diversification skills in U.S. portfolios during the 2000-2012 financial and economic crisis
Components of Gold demand
Coinage Reserve asset
Gold investment motives:
- Speculative demand:
Highest return within the shortest time period. Speculators are looking for gold price fluctuations
- "Protection" demand:
Safe haven value !
Portfolio diversification tool ?
Gold bull market
Last decade was the most prolific for gold
280 USD 1920 USD
Gold price in USD and EUR since 2000
By analyzing a 22-years period from January 1990 to June 2012, the main goal of this master thesis is to investigate the diversification skills of gold in U.S. portfolios. This paper highlights the safe haven properties of a gold investment.
Did gold outperform the other financial assets during the crisis?
Why is not gold consider to improve portfolio diversification?
Was gold able to improve the efficient frontier of portfolios in time of economic distress?
A dissertation by:
The research is based on the risk adjusted performance analysis of portfolios constituted by:
Bonds (10-year T-bills)
Gold (London Gold Fixing)
- Gold and stocks indices performances:
MSCI World index
- Gold and security market performances:
30-year US government bonds
10-year US government bonds
- Gold and cash:
U.S. 90 Day Treasury Bills
- Gold and inflation.
Assumes that returns are normally distributed, i.e. mean and variance completely describe the distribution.
The Sharpe ratio is a risk adjusted measure of performance
The expected return is estimated as the average of historical returns
It calculates the total risk or variance associated with the expected return.
Risk measure based on negative deviations of observed returns compared to a minimum acceptable threshold.
It represents the degree of asymmetry of the distribution around its mean.
It can be described as the measure of the degree of “peakedness and heaviness” of the tails of a distribution.
Did gold outperforme the traditional assets during the crisis ?
Obviously YES it did !
Does gold have good diversification abilities ?
YES it does, since its correlations with the other traditional assets are low (often even negative). Adding gold to portfolios tends to reduce the variance and the excess Kurtosis and to increase the Skewness.
These diversification abilities certainly result from the safe haven properties of gold.
What are the particular features of gold that enable it to play the strategic role of safe haven asset in time of crisis?
Historical monetary role
Stability in the purchasing power
Real tangible investment
Thank you for your attention!
Detailed portfolios allocation
The correlation coefficient is a measure of the linear dependence that could exist between two variables. The correlation coefficient ranges from -1 to 1.
The Sortino Ratio is a risk/return measure that focuses on downside volatility.
The efficient frontier represents all the assets combinations that constitute portfolios for which there is the lowest risk for a given level of expected return.
Correlations between traditional assets are on the rise during the crisis.
Gold does have lower correlation with the traditional asset during economic downturn.
Gold is a good hedge again inflation.
Return on investment for gold, stocks and bonds on different time horizons
Monthly mean returns of the portfolios
Standard deviation of the portfolios
Gold tends to increase the Sarpe and Sortino ratios of the studied portfolios (negative values ?!?).
Gold tends to increase the Skweness and to decrease the Kurtosis of the portfolios.
Gold improves the efficient frontier.
Negative values taken by the Sharpe and Sortino ratios could be explained by an overestimated risk free-rate.
Conclusions that I can make for gold cannot be generalized to the entire precious metal asset class.