Silver in Equity Portfolio Risk Optimization: Polish Investor Perspective

Abstract

Purpose:The study aims to verify whether silver can help reduce the risk of the equity portfolio for a Polish investor without diminishing its return. What are optimal shares of silver and equity in such a portfolio, and does it also improve skewness and kurtosis of the portfolio return distribution compared with a stock portfolio? Do optimal shares change depend on the situation on the silver market? Design/Methodology/Approach: The author calculates descriptive statistics for silver and equity to decide if the former can diversify assets for the latter. As equity, the WIG20 Total Return index is used. Equity-silver portfolio optimization is conducted in the light of the Markowitz theory. The analysis is done for the period between January 2005 and April 2021. Findings: The research shows that including silver in an equity portfolio lets both decrease its risk and increase the return during the silver bull market and an extended period, which take part in a growing silver market trend. Conclusions do not change when the short sale is allowed. It is indicated that during silver bear markets 100% equity portfolio is not an efficient portfolio in the light of the Harry Markowitz theory. Simultaneously, the author suggests that although the portfolio diversification conducted in the study results in diminishing risk understood as variance or standard deviation, the results for skewness and kurtosis of created optimum portfolios are various. Practical Implications: The research may be interesting for institutional and individual Polish investors seeking different diversifying instruments in various market conditions. Originality/Value: The research contributes to the existing international literature by confirming that silver can be a diversifying asset and indicates its optimal shares in the silverequity portfolio in different market conditions for a Polish investor endangered with USD/PLN currency rate risk.