Adding Art to Your Portfolio: A New Risk Assessment Framework

This article presents a new framework to evaluate the merits of an art investment that differs substantially from previous studies. First, it assumes that the investor already holds a portfolio consisting of more traditional assets and is planning to add art to it. This is far more realistic than the usual academic set up in which it is assumed that the investor is planning to deploy a given amount of cash among many assets, one of which is art. Second, the approach departs from the traditional Markowitz’s mean-variance framework in two important ways: (i) the efficient frontier is constructed based on cumulative returns, rather than average returns, and risk is assessed via potential losses and not volatility; and (ii) it relies on a semi-parametric approach to generate synthetic data based on the Gaussian copula and historic returns. Finally, an alternative risk metric, based on losses and not volatility, is introduced. The usefulness of this framework is demonstrated with an example based on art sales auction data.