Rethinking multi-asset portfolio optimisation for a turbulent business environment: new insights

Abstract

Financial asset portfolio optimisation is the primary objective of all fund managers managing multiple asset classes for international investors. Multi-asset portfolios across global markets are regarded as well-rounded financial portfolios. This research paper employs three different financial portfolio optimisation techniques encompassing a diverse range of assets, namely the S&P 500, Emerging Equity Market Index, Gold, Emerging Market Bonds, Crude Oil, REITs, and Bitcoin. The portfolios developed through the traditional Optimal Risky Portfolio (ORP) method demonstrate superior performance compared to alternative portfolio optimisation techniques, specifically the Equal Risk Contribution (ERC) and the Most Diversified Portfolio (MDP) methods, as evidenced by key metrics such as the Sharpe Ratio and Value at Risk (VaR). These findings are consistent across distinct periods, including crisis phases such as the stock market crisis of 2018, the COVID-19 pandemic, the Russia-Ukraine conflict, and the US Fed rate hikes in 2023. The study encompasses all these events within an extensive timeframe from January 2018 to June 2023. The research underscores the importance of single-asset selection during tumultuous market conditions, identifying Bitcoin, Crude Oil, and Gold as viable options. The results reveal that MSCI Emerging Market Equities, Bonds, the S&P 500, and REITs did not significantly enhance risk-adjusted returns during the 2018–2023 period. Notably, the ORP method demonstrated significantly superior Sharpe Ratios and Value at Risk compared to the ERC and MDP methods. Conversely, no significant differences were observed in the Sharpe Ratios and Value at Risk between the ERC and MDP portfolios. This study contributes to the existing body of literature by reaffirming the dominance of the ORP method over the ERC and MDP approaches in volatile market conditions during the turbulent financial period from 2018 to 2023.