Shipping Assets in Portfolio Models: A Portfolio Theory Approach

Abstract

Shipping has a critical role in global trade and is increasingly seen by investors as a high-impact investment with strong diversification potential. Characterized by high returns and substantial volatility, it provides distinct exposure to global trade while exhibiting low correlation with traditional asset classes. This thesis contributes to the literature on portfolio diversification by empirically examining the effect of adding shipping assets to investment portfolios through an out-of-sample analysis. Using modern portfolio theory, the analysis tests shipping’s impact through two key freight indices: the Baltic Dry Index (BDI) and the Baltic Dirty Tanker Index. The impact is evaluated across five portfolio strategies: the Global Minimum Variance portfolio, the Tangency portfolio, the utility-based Optimal and Bayes-Stein portfolios (under three levels of risk aversion), and the Naïve portfolio. Performance is assessed through the Sharpe, Sortino, and Omega ratios and the Certainty Equivalent return based on monthly data from 1998 to 2024. To ensure robustness, the results are evaluated across the whole out-of-sample period and within different bull and bear market periods. The findings show that shipping investments have strong potential to enhance portfolio returns and improve risk-adjusted performance, driven by their diversification benefits. However, the benefits depend on portfolio structure, investor risk preferences, and allocation size. Although investing in shipping offers diversification potential, allocating too much weight to this volatile sector can harm portfolio stability. Low-exposure strategies tend to capture the benefits of shipping more effectively, likely because they avoid the adverse impact of its extreme volatility. The bull and bear market analysis further reveals that the performance contribution of shipping assets is inconsistent across different market periods. While it can enhance returns and improve risk-adjusted performance in both phases, its impact appears more closely tied to shipping-specific cycles than broad economic trends. Thus, the shipping sector remains highly unpredictable, and investment decisions cannot reliably be based on traditional bull or bear market indicators. The results suggest that shipping assets enhance portfolio efficiency when used in moderation and under appropriate conditions, offering valuable diversification for investors seeking to expand beyond traditional assets.