Optimal portfolio choice for ship leasing investments

ABSTRACT

We develop an advanced portfolio analysis method to determine the optimal ship mix for a portfolio. A typical business model of a ship leasing firm is to acquire ships for charter income. However, transportation assets (such as ships and aircraft) are different from financial assets (e.g. stocks and bonds) as they are tangible and have a limited useful life. Thus, methodologies for financial portfolios cannot be simply extended to portfolios of transportation assets. Recently, ship leasing represents a non-traditional source of ship finance. A ship leasing firm can manage a certain number of ships across different ship types. Based on portfolio theory and industry-related evidence, we construct an optimal ship portfolio consisting of a manageable combination of carefully chosen ships. The expected return of the asset combination is examined with respect to various ship types and sizes. We quantify the freight risk for different categories of ships in different sectors to investigate the characteristics of ship portfolios. The estimation of such freight risk is of considerable interest to academics and practitioners alike, because determining the behaviour of freight risk has important implications for investment decisions regarding ships. Our portfolio method should strongly support the decision-making process involved in leasing ships.