Abstract
This paper provides the methodology of estimating the risk-return relationship of alternative asset investments within the mean-variance framework. While conducting strategic asset allocation, most of the institutional investors do not take into account the risk-return relationship of alternative assets, or use arbitrary policy numbers that do not properly reflect the characteristics of alternative assets. This paper borrows the concept of reference portfolio in developing the methodology of estimating the risk-return relationship of alternative investments. The reference portfolio is the benchmark portfolio used in strategic asset allocation by pension funds. This can serve as the opportunity costs of alternative investments. We use the realized IRR’s from actual investments, and estimate the risk-return characteristics of alternative investments. We find that by properly estimating the mapping relationship between the reference portfolio and alternative asset classes, we can incorporate the risk-return profile of these non-market assets within the mean-variance framework together with the other traditional asset classes.
Keywords
Citation
Lee, S.J., Cho, J.W. and Lee, J.H. (2019), "Analysis on the Risk Return Profile of Alternative Assets Under Reference Portfolio Concept", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 27 No. 2, pp. 193-209. https://doi.org/10.1108/JDQS-02-2019-B0003
Publisher
:Emerald Publishing Limited
Copyright © 2019 Emerald Publishing Limited
License
This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode