PORTFOLIO OPTIMIZATION WITH CRYPTO ASSETS : Analyzing the Impact of the Investors' Subjective Views on Portfolio Risk

Abstract: Cryptocurrencies’ population is growing continuously and so is their relevance for portfolio management theory. But as a new asset class with different characteristics and trading patterns, the inclusion of crypto assets to a portfolio brings several difficulties and many professional investors shy away from implementing them. Their main reason being the unpredictability and speculative features of crypto. The possibility for the investor to include their own views in the equation could help solving this problem. In this study the authors created a portfolio combining traditional stocks with cryptocurrencies, calculated expected returns, and built views on the intermediate results. The views were meant to represent an investors’ mindset and should tilt the portfolio more towards their prediction, thus creating a portfolio that better suits their risk profile. The inclusion of the views was successful and when analyzing the results improvements could be found. Even though portfolio performance measures like the Sharpe ratio did not show the best results, the volatility of the portfolio including these highly volatile assets dropped significantly. The Black-Litterman model, which was used as the model to implement the investors’ views, shows potential to be a solution for some of the problems that comes with allocating cryptocurrency.