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Cryptocurrency investments : a statistical analysis of their effect on portfolio risk-return properties.

De Marini, N.L. (2022) Cryptocurrency investments : a statistical analysis of their effect on portfolio risk-return properties.

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Abstract:Interest in cryptocurrency assets among investors is rising. Known for being able to yield high returns in a short timeframe, prices of cryptocurrencies are often volatile. As such, assets in this class typically carry a lot of risk. However, cryptocurrencies may be useful as a diversification tool in traditional asset portfolios. In this study, the effects of adding cryptocurrency assets to already well-diversified portfolios are investigated through mean-variance spanning. A diversified benchmark portfolio is created containing ETFs of various asset classes. Subsequently, Bitcoin and Ethereum will be included in the portfolio to investigate the effects on risk-return properties. Sharpe Ratios are calculated for a portfolio with Bitcoin and Ethereum separately, and then for a portfolio including both assets. A regression analysis is performed in the same manner, with which a test statistic can be computed to determine if adding Bitcoin and Ethereum to the benchmark portfolio has any significant effects. The study concludes that cryptocurrencies can have a positive influence on risk-return trade-offs of diversified traditional asset portfolios. However, cryptocurrency allocation should be kept to a minimum to maintain low volatility levels. By allocating no more than four percent of their portfolio to cryptocurrency assets, investors can reduce risk while maintaining expected returns.
Item Type:Essay (Bachelor)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:International Business Administration BSc (50952)
Link to this item:https://purl.utwente.nl/essays/90948
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