The Fine Art of Investing Determining Risk and Return of an Investment in Art

Posted: 3 Dec 2018

See all articles by Ralph Palliam

Ralph Palliam

American University of Kuwait

Date Written: May 13, 2008

Abstract

If one should buy something only because one loves it for its beauty or some other aspect of aesthetic or personal appeal, one can never really lose. Individuals who collect art and who share the growing interest in art as an investment question whether art is a good investment particularly when art is illiquid and the ability to convert an art investment into cash expeditiously is limited. Anything that can be said about art as an investment obviously applies only to genuine art and not fakes or forgeries. Investors need to be able to find out what is authentic and what is not. Art prices may be quite unpredictable, and investment horizons may run for decades and art often ends up as part of an estate. Past performance in art investing is no indicator of future results. At the same time statistics suggest that discerning investors might at least want to give some thought to adding art to their portfolios. The next issue is whether art serves any function in a portfolio. Sales at the major auction houses are setting record prices for art against the backdrop of major recession. Studies indicate that art values tend to hold up well during periods of economic difficulty and that art indices outperform major stock indices during times of war. Art could therefore be a balancing or stabilizing asset. This study considers whether investing in a fine art at the correct price could diversify a portfolio risk and stabilize the volatility of one's portfolio and position one's art collection for upside appreciation. . Since investment in art is modeled with due regard to the peculiarities of artistic work and value created activities, it follows that the construction of earnings functions and models of career choice in this area will also need to account for the risk and return function. A successful entrepreneur sees business where others do not. The blessing of the capitalist system is that it rewards those that come with good new ideas and bring them to business.

JEL Classification: J10

Suggested Citation

Palliam, Ralph, The Fine Art of Investing Determining Risk and Return of an Investment in Art (May 13, 2008). Available at SSRN: https://ssrn.com/abstract=3280942

Ralph Palliam (Contact Author)

American University of Kuwait ( email )

P.O. Box 3323
Safat, 13034
Kuwait

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