PORTFOLIO OPTIMIZATION AND HEDGING EFFECTIVENESS OF TRADITIONAL AND ALTERNATIVE ASSETS: EVIDENCE FROM THE IRAQI FINANCIAL MARKET

Abstract

In this study, we will analyze portfolio optimization and hedging effectiveness of the financial assets for the Iraqi market, such as private bank stocks, gold and cryptocur-rencies. Research will test to see if the introduction of alternative assets increases the efficiencies of the portfolio and if such assets can offer some degree of protection against exchange rate fluctuations. The contribution of this study lies in the empirical aspect of the study and the clarification of the different roles of traditional and alter-native assets in portfolio management in a developing market. This finding is relevant in the context of investors who want to improve their portfolio performance by using quantitative optimization methods The monthly data from period (2022-2024) were studied through descriptive statistics, correlation analysis and regression approach for hedging properties. The portfolio construction was carried out in the following two methods: a traditional portfolio with equal weights and a modern portfolio based on the Markowitz mean-variance optimization model. Three measures, namely return, risk (standard deviation), and Sharpe ratio were introduced to assess the performance of the portfolio.The empirical results show that there is no significant hedging rela-tionship for most assets with the price of the Iraqi dinar, as this is due to the relative stability of the Iraqi dinar. In addition, gold exhibited weak hedging properties, whereas cryptocurrencies failed to provide strong hedging properties in the presence of their high volatility.With respect to portfolio performance, the results show the inef-ficiency that occurs when there is an incorrect allocation. The results indicate that portfolio efficiency is not only achieved through diversification but also through opti-mal asset allocation.