Diamonds as an Alternative Investment Class -
An Application of the Modern Portfolio Theory with Diamonds
Rihanna dedicated a song to diamonds, Marilyn Monroe made them her best friends, and Zsa Zsa Gabor even said: “I never hated a man enough to give him his diamonds back”. The presence of a diamond’s emotional value is undisputable, and undoubtedly of great importance. However, do diamonds also possess the characteristics to be an investor’s best friends?
Lauro Muff, 2018
Bachelor Thesis, Fine Diamonds
Betreuende Dozierende: Josef Marbacher, Josef Marbacher
Keywords: Alternative Investments, Diamonds, Modern Portfolio Theory
Despite the increasing popularity in passion investments and alternative investments, many of the questions around their applicability in a portfolio context are still unknown to science. The underlying motivation of this paper is the investigation of diamonds’ suitability in an investor’s portfolio. By comparing different carat sizes as well as clarity and color grades, the aim is to find the physical diamonds, which have the best risk-return relationship. Furthermore, a correlation analysis is carried out, which should confirm a diamond’s image of a safe haven investment.
Diamonds neither yield any interest, nor pay out any dividends. Furthermore, there is no guarantee that the price will increase over time. So, can a diamond even be purchased solely for financial motives or will the emotional motives also dominate in the future?
This study aims to contribute to theory by extending earlier research about investing in diamonds by applying a different approach. In order to achieve the aforementioned objectives, the use of an appropriate model is necessary. The Modern Portfolio Theory (MPT), established by Markowitz in 1952, is still one of the best ways to assess the risk-return characteristics of an investment in a portfolio context. In this thesis, diamonds are added to a world market portfolio (MSCI Index). Monthly data for the period 2004 and 2018 is used for this purpose and retrieved from Rapaport Diamond Reports.
The MPT analysis has shown that larger, high-quality diamonds (3-5 ct. diamonds of outstanding clarity and color grades) offer a better risk-return relationship. 1 ct. and 2 ct. diamonds historically did not appreciate enough in value and hence, are not suitable for an investment. A comparison of different characteristics of assets has shown, that gold and other precious metals remain a better option to hedge against volatility. The features of the diamond market (liquidity, transparency etc.) resemble to a great extent to those of a real estate or art market. Due to this lack of standardization, the diamond market is not yet ready for the big mass of investors. Through the know-how and guidance of a broker, an investor could still be able to earn a satisfactory return.
Perhaps more importantly, investors should be clear about their motives, when purchasing a diamond. Investors, who acquire diamonds primarily for financial reasons must be aware of the fact that it is difficult to earn a consistent return. As things stand today, the diamond market is not yet ready for the big mass of financial investors. For most people, investing in a beautiful and scarce treasure still mean a source of enjoyment and expression of status and values to them. Hence, if an investor learns to appreciate the emotional return a diamond provides, he or she does not only rely on the financial return and hence, is sure to win anyway.
Studiengang: Business Administration International Management (Bachelor)
Fachbereich der Arbeit: Banking & Finance