Is gold good for portfolio diversification? A stochastic dominance analysis of the Paris stock exchange

This paper aims to assess the role of gold quoted in Paris in the diversification of French portfolios from 1949 to 2012 using the stochastic dominance (SD) approach. The principal advantage of this method is that there is no restriction on the distribution of the returns. Our results show that stock portfolios including gold stochastically dominate those without gold at the second and third orders. This implies that risk-averse investors would be better off by including gold in their stock portfolios to maximize their expected utilities. The study on sub-periods shows that this result holds especially in unstable or crisis times. However, these results do not hold for bond or risk-free portfolios, for which the portfolios without gold dominate those with gold. To check the robustness of our results, our SD analysis of a mixed portfolio (50% stocks, 30% bonds and 20% the risk-free asset) provides results similar to those for portfolios with stocks only, except from 1971 to 1983. Portfolios including gold quoted in London show results similar to those from Paris. The results of mean–variance performance measures confirm the findings of previous studies that gold is good for the diversification of stock portfolios but not for bond portfolios.