Diversification in crisis : the role of alternative assets in portfolio management amid economic downturns

Abstract

This dissertation investigates whether the inclusion of alternative assets enhances portfolio resilience and diversification relative to the traditional 60/40 equity–bond allocation, with particular attention to performance during periods of financial crisis. Four portfolios—a traditional 60/40 benchmark, a balanced allocation, an alternative-heavy allocation, and an alternative-heavy allocation that includes Bitcoin—were built using the literature on modern portfolio theory, safe-haven assets, and conditional diversification. Descriptive statistics, risk-adjusted performance indicators, correlation analysis, and regression models including crisis dummies and interaction terms, in order to to account for changes in market sensitivity during downturns, were used to assess each portfolio. The data indicates that although the 60/40 portfolio produced the highest long-term returns, it was also the most vulnerable to crises, as shown by the fact that during the inflation shock of 2022, its beta increased from 0.64 to about 0.74. The balanced and alternative-heavy portfolios demonstrated greater resilience at the expense of some long-term return by achieving lower market betas (about 0.50 and 0.43, respectively), less volatility, and smaller crisis coefficients. Bitcoin's inclusion produced the highest mean returns in the shorter 2015–2024 sample, but it also brought significant volatility and unpredictable crisis behaviour, supporting its function as a speculative asset rather than a defensive one. Overall, the results show that, in comparison to the 60/40 benchmark, traditional alternatives can improve portfolio diversity and resilience, albeit with limited and state-dependent advantages. Bitcoin threatens stability but has a large upward potential. The dissertation concludes that a balanced allocation to traditional alternatives provides the most effective trade-off between growth and protection, and recommends further research into illiquid alternatives, different economic regimes and international settings.