Diversification in Times of Crisis: Using Alternative Assets in Portfolio Management During Economic Downturns
DOI:
https://doi.org/10.54536/ajbmi.v1i1.7294Keywords:
Assets and Portfolio Performance, Bitcoin, Diversification, Financial Crises, Portfolio ResilienceAbstract
This research determines the effectiveness of adding more assets in enhancing the resiliency of the portfolio and diversification in relation to the conventional 60/40 equity-bond allocation. The emphasis of the portfolio performance during the period when the financial crisis is witnessed is specifically geared towards the establishment of the trade-off between risk avoidance and long-term development. They were developed in four different portfolios, which consist of a classical 60/40 benchmark, a classical balanced allocation, a classical allocation that is highly balanced in the alternative assets, and an alternative allocation that incorporates Bitcoin. The methodology of using safe-haven assets, and conditional diversification; the empirical analysis consisted of descriptive statistics, risk-adjusted performance indicators, correlation tests and specification of regressions involving the crisis dummies and interaction terms to test sensitivity of the various markets in bad times. It compared the data of the Yahoo Finance, Nareit Database and LSEG Workspace in 2005-2024. The analysis shows that the 60/40 portfolio was most vulnerable to crisis and gives the highest returns in the long run. Its beta levels rose in the 2022 inflation shock, which stood at 0.64 and has risen to an approximate of 0.74. Balanced and the alternative-heavy portfolios were more resilient as reflected by lower market betas (0.50 and 0.43, respectively), reduced volatility, and reduced crisis coefficient, at the cost of somewhat reduced long-term performance. Bitcoin was the best in terms of mean returns in the shorter term, 2015-2024 and it was characterized by a high level of volatility and crisis erratics thus indicating that it was a speculative and not a defensive asset. The results indicate that diversifying a portfolio through investing in conventional alternative assets may enhance portfolio diversification and resilience compared with the 60/40 benchmark and more so, depending on market conditions. The high potential of the returns in Bitcoin is compensated through the instability which will imply that it will need to be actively risk-managed and strategically intended to be included. This paper is a long-term assessment of the integration of alternative assets into traditional portfolios, in which the performance of the alternatives it considers during a crisis is explicitly captured, as well as the evolving market sensitivities. It adds to the literature by uniting the modern portfolio theory with conditional diversification analysis and by assessing both the traditional and digital alternatives in the same empirical framework.
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