HOW TO COMBINE THE SERBIAN STOCK INDEX WITH PRECIOUS METALS IN A MULTIVARIATE MARKOWITZ PORTFOLIO?
Abstract
This paper tries to determine how to combine Serbian stock index, BELEXline, with four precious metals – gold, silver, platinum and palladium, in order to minimize risk. In the process of portfolio construction, we use theoretical concept of Markowitz. In particular, we first determine portfolio of five assets, then exclude an asset with the lowest share and repeat procedure till we reach a portfolio of two assets. In this way, we construct four portfolios of five, four, three and two assets. In five-asset portfolio, portfolio optimization process determines zero share of silver, because silver bears the highest risk of all other portfolio instruments. This, also, means that five- and four-asset portfolios have the same characteristics. On the other hand, in three-asset portfolio, that contain the Serbian index, gold and platinum, we find higher share of platinum, comparing to five-asset portfolio, because platinum has higher negative correlation with BELEXline, vis-à-vis gold-BELEXline pair. Two-asset portfolio, which includes only the index and gold, has higher risk in amount of 5% and 4%, in relation to four- and three-asset counterparts. General conclusion is that three-asset portfolio is the best one, since it has slightly higher risk than five or four-asset portfolio, but it has lower transaction cost, because it includes only three instruments.
References
AlKhazali, O.M., Lean, H.H., Mirzaei, A., Zoubi, T. (2021). A comparison of the gold-oil portfolio and oil portfolio: A stochastic dominance approach. Finance Research Letters, 40, 101670.
Armeanu, D., Balu, F.O. (2008). Testing the efficiency of Markowitz model on Bucharest Stock Exchange. Economic Computation and Economic Cybernetics Studies and Research, 42 (1-2), 201-217.
Cha. H-J., Jithendranathan, T. (2009). Time-varying correlations and optimal allocation in emerging market equities for the US investors. International Journal of Finance and Economics, 4(2), 172-187.
Damnjanović, J., Stankov. B., Roganović, M. (2019). Research on foreign investors needs for
new workforce in free investment zones in autonomous province of Vojvodina. School of Business, 1, 47-68.
Gligorijević, Ž., Ćorović, E., Manasijević, A. (2020). Development processes in the industry of the republic of Serbia during the first decade of the 21st century. Teme, 44(2), 565-583.
Guran, C.B., Ugurlu, U., Tas, O. (2019). Mean-variance portfolio optimization of energy stocks supported with second order stochastic dominance efficiency. Finance a úvěr-Czech Journal of Economics and Finance, 69(4), 366-383.
Hammoudeha, S., Santosb, P.A., Al-Hassan, A. (2013). Downside risk management and VaR-based optimal portfolios for precious metals, oil and stocks. North American Journal of Economics and Finance, 25(C): 318– 334.
Markowitz, H. M. (1952). Mean-variance analysis in portfolio choice and capital markets. Journal of Finance, 7, 77–91.
Marjanović, D., Domazet, I., Vladimir Simović, V. (2020). Influence of tax incentives on the business of foreign investors in Serbia. Teme, 44(3), 969-984.
Mensi, W., Nekhili, R., Vo, X.V., Kang, S.H. (2021). Oil and precious metals: Volatility transmission, hedging, and safe haven analysis from the Asian crisis to the COVID-19 crisis. Economic Analysis and Policy, 71(C): 73–96.
Salisu, A.A., Vo, X.V., Lawal, A. (2021). Hedging oil price risk with gold during COVID-19 pandemic. Resources Policy, 70: 101897.
Zhang, Y., Wang, M., Xiong, X., Zou, G. (2021) Volatility spillovers between stock, bond, oil, and gold with portfolio implications: Evidence from China. Finance Research Letters, 40, 101335.
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).