Impacts of Riskless Assets on Diversification

Diversification is a strategic choice that investors adopt to improve their investments' performance and to make optimal choice that leads to minimization of risk and maximization of return. The optimal method that leads to these objectives has been a great problem in investment. The first Economist that proffer solution to this problem is Harry Markowitz in 1952 with the method called Harry Markowitz Mean Variance (MV) method, before this time investment decisions were done by intuition, but tedious to estimate and the results are often extreme. There have been many attempts to alleviate the problems of MV model. On this basis, the Black-Litterman (BL) model was developed to solve the problem of Markowitz mean-variance. In this paper, we use the method of BL model to estimate the impacts of Riskless Assets on Diversification with the aid of Matlab coding. We explore DataStream of Gold, Silver, Platinum, Oil (risky assets) and Treasury bill (T-bill, riskless asset) from 2006 to 2015. The data was classified into two and three assets portfolios and within the portfolio was further classified as Risky assets and risky with riskless asset, this is necessary to check vividly the impacts of riskless asset on portfolio with risky assets, and portfolio with risky and riskless asset as regards minimization of risk and maximization of returns. It is observed that, diversification of assets is required to bring about the aim of investors, that is, minimization of risk and maximization of return but this aim cannot be achieved except there is assets allocation of riskless and risky assets together in a portfolio. This would lead to efficient portfolio which is the goal of rational investors.