Including Cryptos in Equity Portfolios: Trend or Opportunity?

Abstract

This paper presents a robust methodology for evaluating the impact of incorporating cryptocurrencies into an equity investment universe for portfolio selection purposes. We employ various portfolio selection strategies on randomly selected investment universes consisting of different baskets, one only including equities and three others with varying compositions of equities and cryptocurrencies. We then perform an out-of-sample analysis based on real-world datasets covering 2018 to 2023 to examine the impact of cryptocurrencies on portfolio performance. The empirical findings reveal that cryptocurrencies increase portfolio performance in nearly all cases when included in an equity portfolio. In particular, we observe that, almost always, the improvement in the risk-return profile of mixed portfolios is statistically significant compared to the case of equity-only.

Keywords: portfolio optimization, Cryptocurrencies, performance evaluation, Diversification, Equity risk Premium