Risk-Return Diversification Advantages of a Mixed Cryptocurrency Market Portfolio

Authors: Sandeep Yadav

DOI: https://doi.org/10.5281/zenodo.14059447

Short DOI: https://doi.org/g8qjq4

Country: USA

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Abstract: Cryptocurrencies, despite their strong returns and low correlation with traditional assets, remain underutilized in investment portfolios due to two major concerns: high return volatility and uncertainty regarding the long-term viability of individual cryptocurrencies. In this paper, we propose a comprehensive analysis of the diversification effects offered by a mixed cryptocurrency portfolio, with particular focus on Bitcoin. By constructing and analyzing multiple portfolio configurations, we assess the differences in risk-return profiles when various cryptocurrencies are combined. Our findings indicate that diversified portfolios comprising a basket of cryptocurrencies can mitigate volatility and improve the overall risk-adjusted returns, potentially making cryptocurrencies a more appealing addition to investment portfolios. The paper is organized into the following sections: 1) Introduction, 2) Literature Review, 3) Proposed Methodology 4) Evaluation & 5) Conclusion.

Keywords: Cryptocurrency Portfolio, Bitcoin (BTC), Diversification Benefits, Modern Portfolio Theory (MPT), Efficient Frontier, Capital Allocation Line (CAL), Sharpe Ratio, Idiosyncratic Risk, Capital Asset Pricing Model (CAPM)

Paper Id: 231474

Published On: 2018-05-03

Published In: Volume 6, Issue 3, May-June 2018

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