A Simple Stock-Bond Categorization of Alternative Investments

ABSTRACT: I create a tool to help investors categorize an investment in a diversifying, alternative asset class. Using standard portfolio mathematics, I obtain 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.

This paper was made available on SSRN as of 21 October 2008.

The paper was updated on SSRN on 6 January 2009,17 August 2009 and 17 February 2009.

The paper was accepted at Journal of Investing on 10 May 2010.

The paper was published as the lead article in the Fall 2010 Journal of Investing. The published version is here.