Document Type

Article

Rights and Access Note

working paper

Publication Date

Winter 11-25-2024

First Page

1

Last Page

41

Abstract/ Summary

This research explores the integration of Digital Assets (DA), specifically cryptocurrencies, into traditional Multi-Asset Class (MAC) portfolios, creating a DA-MAC framework. The study finds that well-constructed DA-MAC portfolios can offer significant diversification benefits and improved total returns compared to conventional equity-bond-commodity-real estate portfolios. However, due to the high volatility of digital assets, we recommend including them in small proportions. The research applies established portfolio construction methodologies to incorporate cryptocurrencies, addressing market efficiency and price discovery issues. It utilizes Modern Portfolio Theory (MPT) metrics and tests to analyze the impact of DAs on portfolio performance. Empirical data supports the diversification benefits of DA-MAC portfolios, showing reduced cross-asset correlations and an upward shift in the efficient frontier. While DA-MAC portfolios present interesting opportunities, the role of cryptocurrencies in investment strategies remains a topic of ongoing discussion due to their volatility and regulatory concerns. The recent approval of DA ETFs by the US government marks a significant milestone in their integration into mainstream finance and the asset allocation process. As on November 25, 2024 a Bitcoin is priced at about $98,000 (USD).

Version

pre-print (i.e. pre-refereeing)

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