The impact of cryptocurrencies in an equity investment universe for portfolio selection

In the last decade, cryptos have strongly revolutionized the investment world, and the features of these new types of assets have attracted not only practi- tioners but also academics. Some studies (see, e.g., [1], [2]) have highlighted that cryptocurrency returns generally tend to have no effect on equity returns. This behavior, therefore, suggests the inclusion of cryptocurrencies in equity investment universes to improve portfolio diversification. Indeed, some research works have been conducted to examine the effects of including Bitcoin and other cryptocur- rencies in a well-diversified portfolio, showing that in most cases, the mixed portfolios have a better risk-return profile (see [3], [4], [5]). Following this stream of research, in this paper, we propose a robust methodology to evaluate the impact of cryptocurrencies on an equity investment universe for portfolio selection purposes. Our main contribution to the lit- erature concerns the analysis methodology. Indeed, we apply four portfolio selection strategies (Mean-Variance, Max Sharpe, and two other risk alloca- tion approaches) to randomly chosen investment universes picked on different baskets: one with only equities and three containing various compositions of equities and cryptos. Due to the fast evolution of the cryptocurrency market, we made an in-sample analysis on three different non-overlapping periods, examining both the percentage of cryptos selected by the analyzed portfolio strategies and their impact on risk and profitability. Our extensive empirical analysis shows that, although the inclusion of cryp- tos tends to increase the volatility of portfolio returns, in almost all cases, the mixed equity-cryptocurrency portfolios reveal a significant improvement of the selected portfolios’ performances in terms of both portfolio expected return and Sharpe ratio.