Cryptocurrencies and the Efficient Frontier: A Case of Role Reversal

The advent of cryptocurrencies has captivated many investors and motivated portfolio managers to consider adding cryptocurrencies to investor portfolios, driven by the high prospects of cryptocurrency returns and their low correlations with equity returns. Traditional portfolio theory suggests that...

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Bibliographic Details
Published inJournal of applied financial research Vol. 1; pp. 87 - 95
Main Author Eduardo, Marcelo
Format Journal Article
LanguageEnglish
Published Gulfport Academy of Business Research 01.01.2021
Subjects
Asset allocation
Capital markets
Digital currencies
Diversification
Equity
Portfolio investments
Portfolio management
Scandals
Textbooks
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Summary:The advent of cryptocurrencies has captivated many investors and motivated portfolio managers to consider adding cryptocurrencies to investor portfolios, driven by the high prospects of cryptocurrency returns and their low correlations with equity returns. Traditional portfolio theory suggests that adding a risk-free asset to an equity portfolio mix produces an improvement in the efficient frontier that depicts an asset allocation decision. Using a similar approach, we examine the effect of adding a cryptocurrency asset (the Bitcoin) to an equity portfolio (the SP500). We find that adding the cryptocurrency to the existing equity portfolio produces a similarly linear efficient frontier which reduces to an asset allocation decision, but with the roles reversed. The SP500 serves as the approximate intercept and the Bitcoin serves as the risky investment choice.
ISSN:2381-3105