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Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds

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  • Nuria Bajo Davó

    (Universidad Autónoma de Madrid, Facultad de Ciencias Económicas y Empresariales, Cantoblanco 28049, Spain.)

  • Carmen Mendoza Resco

    (Universidad Autónoma de Madrid, Facultad de Ciencias Económicas y Empresariales, Cantoblanco 28049, Spain.)

  • Manuel Monjas Barroso

    (Universidad Autónoma de Madrid, Facultad de Ciencias Económicas y Empresariales, Cantoblanco 28049, Spain.)

Abstract

This article examines the formation of efficient portfolios using mutual funds that invest in life settlements in combination with fixed-income and equity index funds. We investigate the optimal weighting of these assets and their contribution to performance and portfolio risk. We find a significant negative correlation between the selected life settlement funds and certain U.S. and European fixed-income and equity funds. Furthermore, these correlations are lower than the correlations between the index funds that replicate each other. These results suggest that life settlement funds are an appropriate financial instrument to achieve greater diversification for a portfolio made up of a fund of funds and to improve fund performance as they provide a fixed return with a lower level of risk.

Suggested Citation

  • Nuria Bajo Davó & Carmen Mendoza Resco & Manuel Monjas Barroso, 2013. "Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 38(1), pages 22-42, January.
    • Handle: RePEc:pal:gpprii:v:38:y:2013:i:1:p:22-42
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    Cited by:

    1. Alexander Braun & Sarah Affolter & Hato Schmeiser, 2016. "Life Settlement Funds: Current Valuation Practices and Areas for Improvement," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 19(2), pages 173-195, September.
    2. Mihovil Anðelinoviæ & Filip Škunca, 2023. "Optimizing insurers investment portfolios: incorporating alternative investments," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 41(2), pages 361-389.

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