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Cryptocurrencies and Market Indices: A Markowitz Portfolio Optimization Problem

Lever, Espen LU (2022) NEKH01 20221
Department 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:
author
Lever, Espen LU
supervisor
organization
course
NEKH01 20221
year
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}},
}