Energy Risk Management with Carbon Assets

Abstract

This article proposes a mean-variance optimization and portfolio frontier analysis of energy risk management with carbon assets, introduced in January 2005 as part of the EU Emissions Trading Scheme. In a stylized exercise, we compute returns, standard deviations and correlations for various asset classes from April 2005 to January 2009. Our central result features an expected return of 3% with a standard deviationMean-variance optimization; Portfolio frontier analysis; CAPM; CO2; Carbon; Energy; Bonds; Equity; Asset Management; EU ETS; CERs