Diamonds as an Alternative Investment Class - An Application of the Modern Portfolio Theory with Diamonds

Abstract

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?