Art as an investment: risk, return and portfolio diversification in major painting markets

The present paper examines risk, return and the prospects for portfolio diversification among major painting and financial markets over the period 1976–2001. The art markets examined are Contemporary Masters, French Impressionists, Modern European, 19th Century European, Old Masters, Surrealists, 20th Century English and Modern US paintings. The financial markets comprise US Treasury bills, corporate and government bonds and small and large company stocks. In common with the published literature in this area, the present study finds that the returns on paintings are much lower and the risks much higher than conventional investment markets. Moreover, while low correlations of returns suggest that opportunities for portfolio diversification in art works alone and in conjunction with equity markets exist, the construction of Markowitz mean‐variance efficient portfolios indicates that no diversification gains are provided by art in financial asset portfolios. However, diversification benefits in portfolios comprised solely of art works are possible, with Contemporary Masters, 19th Century European, Old Masters and 20th Century English paintings dominating the efficient frontier during the period in question.