Private Equity and Diversified Portfolios

Abstract

Private Equity is an important means of investment that has a significant role in the growth of small and medium companies, especially after the credit crunch, one of the consequences of the economic crisis of 2008. In particular, Private Equity funds invest in companies with potential growth opportunities and promise high returns to investors. However, this investment is long-term and illiquid and, consequently, only institutional investors and individual highly-skilled investors are able to include this asset class in their portfolios. Anyway, with funds of funds, ETFs, and listed funds, retail investors as well have access to Private Equity, which is seen as a new opportunity to diversify. The purpose of this thesis is to study the role of Private Equity in a strategic asset allocation. In particular, the hypothesis of low correlation between Private Equity and other asset classes will be tested. Furthermore, the thesis will investigate whether the Private Equity asset class improves the efficient frontier of the traditional portfolio. The analysis, which will be implemented with Matlab, will involve the Mean-Variance, the Mean-MAD and the Mean-Conditional Value at Risk portfolio optimization models, in order to consider the point of view of investors who are concerned about losses.