Returns on Alternative Investment Media and Implications for Portfolio Construction

TLDR

Prior portfolio research has largely concentrated on common stocks and the risk‑free rate, while studies of bonds, real estate, and commodities rarely examine their covariances with other asset classes. This study calculates ex‑post returns and correlation coefficients for twelve alternative investment media from 1949‑1969 to assess their impact on portfolio construction. The authors review existing literature, describe data collection and return‑calculation methods, and analyze the resulting return and correlation statistics. The analysis reveals substantial variation in mean returns and correlations across media, suggesting that incorporating alternative assets can diversify portfolios and affect expected returns.

Abstract

Most of the prior work in the area of portfolio construction has focused exclusively on common stocks and the riskless rate of return. Studies of rates of return on other investment media, such as bonds, real estate and commodities, generally have not included an investigation of covariances with other media. This paper computes ex post rates of return and correlation coefficients for twelve alternative investment media' for the period 1949-69 inclusive and analyzes the implications of the results for portfolio construction. The first section of the paper reviews prior work. The following section provides a short description of the methodology used in collecting the data and in computing the results. The third section presents an analysis and interpretation of the results of the study. The final section of the study discusses the implications for portfolio construction of the findings which show considerable variation in mean ex post returns and correlation coefficients among the various media.