Portfolio Performance Analysis: Combining Cryptocurrencies with Traditional Assets

Abstract

This paper investigates the role of cryptocurrencies in enhancing the performance of portfolios constructed with traditional assets. Therefore, my thesis wants to ascertain if investors should consider adding cryptocurrencies to their investment portfolios. The sample period covers almost seven years of daily data. I consider four cryptocurrencies: Bitcoin, Ethereum, Ripple, and Litecoin. Using the mean-variance framework, I document that these cryptocurrencies can improve the risk-adjusted returns of different allocation strategies. Both the in-sample and out-of-sample analyses suggest that the diversification benefits of cryptocurrencies are present before and after the onset of the Covid-19 pandemic. The contribution and weight of cryptocurrencies within portfolios vary according to investors’ preferences. The Maximum Utility portfolio suggests that risk-taking investors should give more weight to cryptocurrencies in their portfolios. As for an investor inclined to minimize the volatility, the Minimum Variance portfolio recommends weights close to zero.