The persistence of memory of Marilyn: the diversification potential of individual artists

We investigate the investment performance of the art of Andy Warhol and Salvador Dali through constructing hedonic price indices from auction sales records. Although the arithmetic average returns are higher for the art than for equities, the geometric returns and the Sharpe ratios of the art indices underperform the market, because of their higher volatilities. The Capital Asset Pricing Model (CAPM) regression results indicate that Dali artworks were negatively correlated with the stock market and achieved a positive and significant Jensen's alpha of 12.3%. Therefore, investment in selected artists' works can provide sufficient diversification benefits even for individual investors unable to diversify their art portfolios.