Cryptocurrencies and Market Indices: A Markowitz Portfolio Optimization Problem
(2022) NEKH01 20221Department of Economics
- Abstract
- This thesis will explore the role of cryptocurrencies in a market index portfolio. The portfolios of
a mix of Bitcoin, Ether and the market indices S&P 500, OMXS30 and VTI will be examined
and optimized to maximize the Sharpe ratio. This process is done using the Markowitz Portfolio
Theory for portfolios containing one market index and either one or both cryptocurrencies,
numerically optimizing the portfolios in regard to the Sharpe ratio and comparing them to the
descriptive statistics of the market indices. This process is then repeated for three subsamples,
looking at the performance of the portfolios before the Covid-19 lockdown, during the lockdown
period, and from the end of 2021 onward. Due to Bitcoin and Ethereum enjoying... (More) - This thesis will explore the role of cryptocurrencies in a market index portfolio. The portfolios of
a mix of Bitcoin, Ether and the market indices S&P 500, OMXS30 and VTI will be examined
and optimized to maximize the Sharpe ratio. This process is done using the Markowitz Portfolio
Theory for portfolios containing one market index and either one or both cryptocurrencies,
numerically optimizing the portfolios in regard to the Sharpe ratio and comparing them to the
descriptive statistics of the market indices. This process is then repeated for three subsamples,
looking at the performance of the portfolios before the Covid-19 lockdown, during the lockdown
period, and from the end of 2021 onward. Due to Bitcoin and Ethereum enjoying astronomical
returns over the time period examined in the thesis, the optimal portfolios were heavily allocated
into the cryptocurrencies. Similar results were shown for the pre- and mid-pandemic portfolios.
The post-pandemic portfolios experienced negative returns, therefore allocating fully into the
less volatile market indices. These results suggest that the inclusion of cryptocurrencies into
market index portfolios is very beneficial for the Sharpe ratio, but should be approached with
caution by the more risk-averse investor. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9100990
- author
- Lever, Espen LU
- supervisor
-
- Simon Reese LU
- organization
- course
- NEKH01 20221
- year
- 2022
- type
- M2 - Bachelor Degree
- subject
- keywords
- Cryptocurrency, Bitcoin, Ethereum, Sharpe ratio, Market index
- language
- English
- id
- 9100990
- date added to LUP
- 2022-10-10 08:51:08
- date last changed
- 2022-10-10 08:51:08
@misc{9100990, abstract = {{This thesis will explore the role of cryptocurrencies in a market index portfolio. The portfolios of a mix of Bitcoin, Ether and the market indices S&P 500, OMXS30 and VTI will be examined and optimized to maximize the Sharpe ratio. This process is done using the Markowitz Portfolio Theory for portfolios containing one market index and either one or both cryptocurrencies, numerically optimizing the portfolios in regard to the Sharpe ratio and comparing them to the descriptive statistics of the market indices. This process is then repeated for three subsamples, looking at the performance of the portfolios before the Covid-19 lockdown, during the lockdown period, and from the end of 2021 onward. Due to Bitcoin and Ethereum enjoying astronomical returns over the time period examined in the thesis, the optimal portfolios were heavily allocated into the cryptocurrencies. Similar results were shown for the pre- and mid-pandemic portfolios. The post-pandemic portfolios experienced negative returns, therefore allocating fully into the less volatile market indices. These results suggest that the inclusion of cryptocurrencies into market index portfolios is very beneficial for the Sharpe ratio, but should be approached with caution by the more risk-averse investor.}}, author = {{Lever, Espen}}, language = {{eng}}, note = {{Student Paper}}, title = {{Cryptocurrencies and Market Indices: A Markowitz Portfolio Optimization Problem}}, year = {{2022}}, }