Date of Award

Spring 2024

Degree Name

Bachelor of Science (BS)

Advisor(s)

Kevin Mirabile

Abstract

The purpose of this research paper is to mathematically analyze the merits of allocation to private asset classes, with a focus on private equity. This paper seeks to compile research on different aspects of private assets and weigh data within the context of portfolio allocation in a historical context. The main research questions of this paper are: Does private equity still generate a return in excess of public markets? Are private equity (and other private asset class) returns correlated with those of public market returns? How do private asset classes fare against each other in terms of risk and return? In allocating a balance portfolio, do private assets such as private equity have ability to generate excess return or reduce risk? This paper begins with an introduction to private equity as an asset class, examining its role in business and investment as well as its recent prominence, outperformance, and criticism. A literature review is then conducted to organize certain conclusions about the industry relating to pure return, risk, allocation, and other factors. The study then simulates optimized portfolios using 15-year historical returns as well as forward capital market estimates, allocating including alternatives under pragmatic considerations. In conclusion, alternative assets provide a highly attractive risk-adjusted return, effectively doubling the Sharpe ratio in both directions of study. While corporate bonds maintained strong allocations in both forward and trailing portfolios, alternatives effectively substituted the role of equities delivering higher return, less risk, and decreased correlation. Forward-looking allocation skewed towards alternatives as well, yet placing weight towards Real Estate, explained by a high Sharpe ratio from forward expectations. The study supports prior literature recognizing the role of alternatives in portfolios, both in the past and future.

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