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Mitigating downside risk of portfolio diversification: Wine versus other tangible assets

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  • Masset, Philippe
  • Maurer, Frantz

Abstract

Investors increasingly use tangible assets and especially wine to reduce the volatility of their portfolios through improved diversification. However, these assets are long-horizon investments, and therefore, short-term fluctuations (volatility) are of little relevance. Instead, assessing if these assets reduce the risk of facing severe losses (downside risk) appears more appropriate. Unfortunately, the literature offers little guidance on this issue. To address this, we analyze portfolios containing both traditional and tangible assets. Our results demonstrate that wine not only presents a lower downside risk than most other tangible assets but also reduces portfolios’ downside risk. This is due to wine-market specific factors driving wine returns and thus disconnecting them from other asset returns. We also show that gold presents similar advantages as wine and that combining these two assets may further enhance their effect. Overall, allocating around 10% of a portfolio to wine seems sensible from a downside risk management perspective.

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  • Masset, Philippe & Maurer, Frantz, 2021. "Mitigating downside risk of portfolio diversification: Wine versus other tangible assets," Economic Modelling, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:ecmode:v:102:y:2021:i:c:s0264999321001681
    DOI: 10.1016/j.econmod.2021.105579
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    More about this item

    Keywords

    Fine wines; Tangible assets; Alternative investments; Downside risk; Extreme returns;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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