Gold As A Portfolio Diversifier Harvard Case Solution & Analysis


             The most compelling arguments for investing in Gold are:

  • Throughout the ages gold has maintained its value. People consider gold as one of the ways to preserve their wealth unlike coins, paper currency and other assets.
  • The price of gold increases when the cost of living increases, therefore, it is considered as one of the excellent hedge against inflation.
  • The value of gold is still retained even in the times of financial uncertainty. Gold usually outperforms other investments when the world tensions arise and then the people run towards its safety.
  • In most of the countries of the world, gold is embedded into the culture which had boosted the demand for gold because of the increased wealth of the emerging market economies.
  • Portfolio diversification is another important factor due to which people invest in gold because gold has negative correlation with stocks and low correlation with other asset classes which reduces the overall portfolio volatility and risk.

The most compelling arguments against investing in Gold are:

  • If the value of gold does not goes up then the gain is only nominal and there is no actual increase in the buying power.
  • There are also hidden costs related to the guaranteed buy-back of the gold purchases.
  • Gold is also prone to manipulation by the people who want to boost their paper money by suppressing the value of gold.
  • There is no source of financing with the investment in gold and there is no leverage to build wealth.
  •  The gold market is more dependent on the anticipations of the investors than the forces of supply and demand.


            The mean returns of US large cap stocks are the highest with the highest standard deviation. The correlation of the US large cap stocks is also lower with all the other three classes of assets and its correlation with gold is negative at -0.11. On the other hand, the lowest standard deviation is found to be for US T-bills; however, the mean returns of this asset class are also the lowest. The correlation of this asset class with the other three asset classes is average, with negative correlation with gold.

            Different investors have different risk profiles. Therefore, based on the risk profiles of the different investors the recommended investments would be as follows:

  • For a risk taker investor, the most preferable investment would be US large cap stocks.
  • For a conservatively neutral investor, the investment in t-bills would be the best option.
  • For a risk averse investor, the recommended investment would be in Gold because of its negatively correlated returns with all the other three types of investment.

All of these numbers are consistent with the WGCs claim of superior risk adjusted returns.


            The mean returns, standard deviations and the correlations calculated based on the annual data from 1988 to 2011 are different from the monthly based return values. The difference is due to the magnitude of the timings of the investments held and the fluctuation of the returns of the three asset classes. Therefore, the data to be used for the returns of the different classes of assets should be based on annual returns, because the impact of many factors is incorporated within it which have the impact on the returns of the investments, therefore, they reveal the true picture for each of the asset classes. Hence, the historical data that should be used in the optimization problems are be based on annual returns so that the problem is realistically optimized.


            Refer to the excel sheet for the calculations.


            After the optimization of both the scenarios with and without the inclusion of gold, the total returns from the portfolio are maximized when gold is added to the portfolio. This might be due to its negative correlation with the other types of asset classes. Based on the returns, an investor should include gold in his portfolio to maximize the returns and also the volatility of the returns.


            Based on the asset optimization performed on the 11 asset optimizer, which is more close to the realistic scenarios, the returns after the inclusion of gold have slightly reduced. Therefore, if we compare this scenario with the one in question...................................

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