Water as an Asset Class (Revised Version)

As correlations of asset returns increased and diversification effects vanished during the financial crisis, the search for new and potentially uncorrelated asset classes gains importance. As a result, several asset classes have been analyzed by academics in order to determine their diversification properties. In this article we take a closer look at water as an asset and its potential diversification benefits. Water as an alternative asset improves a traditional stock and bond portfolio. Though the enhancement of a portfolio’s Sharpe ratio due to the inclusion of water as an additional asset is of economic significance, we do not find evidence of statistical significance.