A Simple Stock–Bond Categorization of Alternative Investments

Abstract

In this article, the author creates a tool to help investors categorize an investment in a diversifying, alternative asset class. Using standard portfolio mathematics, he obtains a precise analytical solution to the proportion of the new investment that should be considered stock-like and the proportion that should be considered bond-like. These proportions rely on whether the alternative asset is funded from stocks or bonds. The resulting formula can readily incorporate the parameter ambiguity that often surrounds alternative assets. While the approach is reductionist, categorical thinking about alternative assets can help investment decision making, particularly by non-specialists.

TOPICS: Security analysis and valuation, real assets/alternative investments/private equity, portfolio construction