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

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Author Info

  • Nuria Bajo Dav�

    (Universidad Aut�noma de Madrid, Facultad de Ciencias Econ�micas y Empresariales, Cantoblanco 28049, Spain.)

  • Carmen Mendoza Resco

    (Universidad Aut�noma de Madrid, Facultad de Ciencias Econ�micas y Empresariales, Cantoblanco 28049, Spain.)

  • Manuel Monjas Barroso

    (Universidad Aut�noma de Madrid, Facultad de Ciencias Econ�micas y Empresariales, Cantoblanco 28049, Spain.)

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    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.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Issues and Practice.

    Volume (Year): 38 (2013)
    Issue (Month): 1 (January)
    Pages: 22-42

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    Handle: RePEc:pal:gpprii:v:38:y:2013:i:1:p:22-42

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