The Role of Gold in a Portfolio in Different Market Conditions-Is gold still an attractive investment after the financial crisis in 2008?

University essay from Lunds universitet/Företagsekonomiska institutionen

Abstract: This thesis examines whether gold is still attractive to be invested as one of the portfolio component after the financial crisis in 2008. Besides, the study suggests the appropriate weight of gold in the portfolio investment during the normal and crisis periods. This paper uses the U.S. stock, bond, and gold data from 1997 until 2013 to investigate optimal weights by constructing the optimal portfolio obtained by the Variance Minimization and the Sharpe Ratio Maximization under the Markowitz Mean-Variance framework. The result indicates that gold gradually decreases its importance through time, particularly the last study period after the U.S. debt crisis in 2011. The two optimization frameworks show the same outcome of significant drop in the gold’s weight in the last study period, resulting from both its bad performance and the highly positive correlation between gold and stock. Regarding to the two different market conditions, investors are suggested to invest more proportion of gold during the crisis period than that during the normal period. However, the level of the optimal weight depends on different investment objectives, which suggests a higher fraction under the Sharpe Ratio Maximization framework.

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