Question

Explain the advantages of alternative assets from the standpoint of a Markowitz efficient frontier. Relate international assets - and alternative assets - as well as fixed income, equities, and cash to the answer.

Answer 1

Markowitz efficient frontier

Markowitz efficient frontier illustrates an optimal portfolio with less risk for a given level of return and high return for a given level of risk. The efficent frontier can be pushed out and the portfolio volatility can be reduced by the inclusion of alternative assets into it. The alternative assets moves efficent frontier up and to the left. Then there will be high return for less risk and less risk with high return.

Source: www.thestreet.com

Advantages of alternative assets

1. Alternative investments have the potential to change the risk - return characteristics of the portfolio. It changes the risk and return characteristics of investment.
2. It reduces the volatility and increases diversification.
3. Alternative investments especially fixed income, equity and cash have low correlation with traditional asset classes, which leads to lower volatility.
4. Potential for long term performance is another advantage of alternative investments.