Abstract
AbstractThis paper analyzes the diversification benefits of adding alternative crypto‐assets in a traditional portfolio, from the perspective of an investor who seeks to achieve multiple objectives. Our analysis is based on daily and weekly return data for eight different assets including Bitcoin, Ethereum, Ripple, for the crypto‐assets and NASDAQ, S&P500, Dow‐Jones, Crude‐Oil, and Gold, for traditional assets. We use both in‐sample and out‐of‐sample estimation procedures to analyze these data sets. We apply the weighted sum of deviations goal programming method to solve a bi‐objective optimization problem where investors optimize simultaneously portfolio risk and return. For a variety of investor characteristics, ranging from risk‐seeking to risk‐averse, we show that augmenting portfolios with alternative crypto‐currencies improves portfolio performance and the efficiency frontier, compared to standard portfolios. This improvement is even more observable for risk‐seeking investors, for both in‐sample and out‐of‐sample estimation procedures.
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