Topic #5. Application of Portfolio Diversification Theories

Art as an Investment: The Market for Modern Prints

J. D. Han

King’s College UWO

Returns and Risks

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rbond i

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*Remark

• The art prints have the lower rate of return at a given risk, compared with other financial assets. In other words, the art prints seem to be inferior: For the same risk, the returns are lower.

Would we include these prints in our portfolio?

• The answer:

- Not as a single investment item.

- But, we may include them in the portfolio.

Why? Let’s explain.

The Art Prints have a very desirable property in terms of portfolio diversification: a Negative Correlation Coefficient with some Financial Assets

Prints Stocks Bonds T-Bills Inflation

Prints 1 0.3 -0.10

(-0.17)

-0.21

(-0.27)

0.03

(0.08)

stocks 1 0.46 0.27 -0.31

bonds 1 0.73 -0.56

T-Bills 1 -0.73

Inflation 1

• The prints could provide an attractive investment as their inclusion in a portfolio of traditional financial assets serves to reduce the entire risk.

Returns and Risks• When T bills and prints are mixed at the

ratio of 94 to 6(%), the portfolio has the minimum variance.

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