This research examines whether diversification strategies remain effective across different macroeconomic regimes. Using daily data for SPY, BIL, and GLD, I compare a concentrated equity portfolio (100% SPY) with a diversified allocation (40% SPY, 35% BIL, 25% GLD) during three major crisis periods: the 2008 financial crisis, the COVID-19 crash of 2020, and the inflation shock of 2022.
Performance is evaluated using drawdowns, recovery-window returns, and annualized Sharpe and Sortino ratios. The results show that diversification significantly reduces downside risk during deflationary crises, while inflation-driven shocks weaken the effectiveness of traditional diversification.
Research Overview
Quantitative Finance Study on Diversification and Crisis Regimes
Financial markets often assume that diversification protects portfolios during crises. However, historical evidence suggests that correlations between assets can change dramatically depending on the macroeconomic environment.
This project investigates how diversification behaves under different economic regimes. Using daily return data for SPY (equities), BIL (short-term treasury bills), and GLD (gold), I construct two portfolios: a concentrated equity portfolio and a diversified multi-asset allocation. Each portfolio is analyzed across three crisis periods (2007-2009, 2020, and 2022).
The analysis focuses on maximum drawdowns, crisis-period returns, recovery-window performance, and risk-adjusted metrics such as annualized Sharpe and Sortino ratios. By comparing these outcomes across regimes, the research highlights when diversification meaningfully improves portfolio stability and when it becomes less effective.
Risk-Adjusted Performance of Diversification Strategies Across Macroeconomic Regimes
This research examines whether diversification remains effective across different macroeconomic regimes. Using daily data for SPY (equities), BIL (short-term Treasury bills), and GLD (gold), I compare a concentrated equity portfolio (100% SPY) with a diversified allocation (40% SPY, 35% BIL, 25% GLD) across three major crisis periods: the 2008 financial crisis, the COVID-19 crash of 2020, and the inflation shock of 2022.
Performance is evaluated through maximum drawdowns, crisis and recovery-window returns, and risk-adjusted metrics such as annualized Sharpe and Sortino ratios. The results suggest that diversification significantly reduces downside risk during deflationary crises, while inflation-driven shocks weaken the effectiveness of traditional diversification strategies.