Portfolio Optimization: The search for an optimal portfolio with cryptocurrencies and S&P 500

Abstract

This thesis’ aim is to create an optimal portfolio consisting of Bitcoin, Ethereum and S&P 500. We also examine the minimum variance portfolio with the framework of Markowitz's mean variance optimization model. We evaluate the performance of the optimal portfolio and compare it to the minimum variance portfolio based on the risk measures Sharpe ratio and Conditional Value at Risk. We find that the optimal portfolio consists of almost a third position towards cryptocurrency. Compared to how previous studies of portfolios have diversified towards cryptocurrencies our study finds that the optimal portfolio consists of a higher percentile amount of cryptocurrencies. Our second major finding is that a smaller diversification towards cryptocurrencies can give less volatility compared to investing fully in a traditional index, such as, S&P 500. The latter result contradicts some previous investment advice that cryptocurrency has too high volatility for diversification benefits.