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Can Cryptocurrencies be a reasonable Portfolio Addition? A Portfolio theoretical Analysis based on Markowitz's Portfolio Selection Theory

  • Cryptocurrencies are becoming increasingly popular as an investment object due to the underlying promising blockchain technology, a growing number of use cases and especially because of their recent enormous price increases. As a young and emerging asset class, cryptocurrencies also face investors with several challenges and uncertainties. This thesis investigates the impact of adding cryptocurrencies to diversified portfolios and whether cryptocurrencies can be a reasonable portfolio addition for investors. For this purpose, based on Harry Markowitz's Portfolio Selection Theory, a statistical analysis of portfolios with and without cryptocurrencies and different degrees of diversification was conducted for a 5-year-period. The portfolios were analysed in terms of return, risk and correlations and the efficient portfolio allocations as well as efficient frontiers were determined for different return and risk scenarios, both with and without the use of short sales. The results of the statistical analysis showed that cryptocurrencies have significantly higher returns but also higher levels of volatility and risk than traditional asset classes. Although cryptocurrencies show less strong positive correlations with other traditional assets, they nevertheless correlate positively with the representatives of the traditional asset classes examined, which is why cryptocurrencies are only suitable to a limited extent as a means of risk diversification. Cryptocurrencies can be an attractive portfolio diversification but only for investors who are willing to accept higher risks for higher returns as the addition of cryptocurrencies significantly increases both the return potential and the risk of portfolios. Therefore, the higher an investor's expected portfolio returns and risk appetite, the higher should be the portion of cryptocurrencies in his portfolio.

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Author:Simon Marcel Ketterer
Advisor:Marc Peter Radke
Document Type:Master's Thesis
Year of Completion:2022
Granting Institution:Hochschule Furtwangen
Date of final exam:2022/02/10
Release Date:2022/02/07
Tag:Blockchain technology; Cryptocurrencies; Efficient portfolio allocation; Markowitz portfolio selection theory; Statistical analysis
Degree Program:MBA - International Business Management
Functional area:Economics
Licence (German):License LogoUrheberrechtlich gesch├╝tzt