Fine Wine as an Investment: The Risk-Adjusted Profitability and the Role in Portfolio Diversification
Sara, Jari (2019)
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The purpose of this thesis is to examine the return characteristics of fine wine as an investment and the role of fine wine in portfolio diversification. Investors seek investment opportunities, which can increase portfolio performance. As alternative investments, such as fine wine, can be uncorrelated with traditional assets, it is necessary to study fine wine as an investment and the potential diversification benefits of including fine wine in a portfolio. The empirical research is conducted by comparing the risk-adjusted performance of fine wine to stocks, bonds and gold with 4 performance measures: Sharpe ratio, Sortino ratio, value at risk and expected shortfall. The role in portfolio diversification is first tested with inflation hedging properties of fine wine, which is tested with linear regression models, and lastly the traditional mean-variance framework is deployed for obtaining the optimal portfolio. The total sample consist of 3710 monthly observations over a time period from January 1988 to December 2018.
On average, in inflation-adjusted terms, the average annual return for fine wine is 5.60%, which the second highest real return after mid cap U.S. stocks with 6.55% return. The results suggest that on a risk-adjusted basis, fine wine is the second most profitable investment after bonds, which has lower standard deviation of returns compared to other asset classes. Compared to stocks, fine wine is more profitable in all performance measures, except for Sharpe ratio, where mid cap U.S. stocks are more profitable.
In terms of portfolio diversification, for inflation hedging, fine wine and gold show evidence of inflation hedging properties. Fine wine seems to hedge both against expected and unexpected inflation, and the results are statistically significant at 1% level. Moreover, fine wine investments in a portfolio increases portfolio performance, since the efficient frontier with fine wine investments is higher compared to portfolio without fine wine, which results in a steeper capital allocation line. The optimal portfolio with fine wine consists of bonds (74.47%), fine wine (15.60%) and mid cap U.S. stocks (9.93%) and the Sharpe ratio for this portfolio is 0.78, when the Sharpe ratio for optimal portfolio without fine wine is 0.72.
The results indicate that fine wine could be beneficial for portfolio diversification due to low correlation with traditional asset classes and lower standard deviation compared to stocks. The information presented in this study provide information to individual and institutional investors on how alternative investments can increase portfolio performance.
On average, in inflation-adjusted terms, the average annual return for fine wine is 5.60%, which the second highest real return after mid cap U.S. stocks with 6.55% return. The results suggest that on a risk-adjusted basis, fine wine is the second most profitable investment after bonds, which has lower standard deviation of returns compared to other asset classes. Compared to stocks, fine wine is more profitable in all performance measures, except for Sharpe ratio, where mid cap U.S. stocks are more profitable.
In terms of portfolio diversification, for inflation hedging, fine wine and gold show evidence of inflation hedging properties. Fine wine seems to hedge both against expected and unexpected inflation, and the results are statistically significant at 1% level. Moreover, fine wine investments in a portfolio increases portfolio performance, since the efficient frontier with fine wine investments is higher compared to portfolio without fine wine, which results in a steeper capital allocation line. The optimal portfolio with fine wine consists of bonds (74.47%), fine wine (15.60%) and mid cap U.S. stocks (9.93%) and the Sharpe ratio for this portfolio is 0.78, when the Sharpe ratio for optimal portfolio without fine wine is 0.72.
The results indicate that fine wine could be beneficial for portfolio diversification due to low correlation with traditional asset classes and lower standard deviation compared to stocks. The information presented in this study provide information to individual and institutional investors on how alternative investments can increase portfolio performance.