Diversification of the Equity Portfolio Using Precious Metals in Poland

Abstract

The asset allocation is a primary tactic according to theory practitioners. It allows investors to create portfolios to minimalize the overall risk of the portfolio for a given expected return or to get the strongest possible return without assuming a greater level of risk than they are comfortable with. This study presents the risk and the effectiveness of equity portfolios in Poland which are diversified using precious metals. The portfolios are built in according to the Markowitz model. We find that adding a gold or more metals reduces the overall risk of portfolio and improves portfolio performance substantially. Relative to silver, platinum and palladium, gold has better stand-alone performance and appears to provide a better hedge against the negative effects of prices changing. Overall, our evidence suggests that investors could improve portfolio performance considerably by adding precious metals.