Investment diversification of petroleum-based sovereign wealth funds under different market conditions with different risk metrics

This paper focuses on the optimal number of sovereign wealth funds (SWFs) that make a diversified portfolio, or the marginal contributions to risk reduction of an additional SWF. We apply three prominent risk measures, namely, standard deviation, conditional value-at-risk (CVaR), and semi-variance to SWF portfolio simulations. Using annual return data from 21 SWFs over the period 2011–2024, we assess diversification effectiveness across varying market conditions. Simulations span full-sample analysis, pre- and post-COVID-19 periods, and bull vs. bear markets as classified by MSCI World Index returns. Results demonstrate that while diversification benefits are present under all metrics, the magnitude and rate of risk reduction differ substantially across market conditions. We find also that CVaR and semi-variance provide greater sensitivity to downside risk, especially in volatile markets, emphasising the need for multi-dimensional risk frameworks in sovereign portfolio management.