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|Title||Portfolio Analysis of Cryptocurrencies: Diversification Benefits and Return Factors|
|Institution||University of Zurich|
|Faculty||Faculty of Business, Economics and Informatics|
|Number of Pages||81|
|Abstract Text||Monetary policy is of central interest to economists, and in-depth analyses of investments are a main interest of finance research. Cryptocurrencies essentially affect both research fields and divide the opinions of researchers about the fundamental assessment of alternative assets. Besides addressing different fields of economics, the assessment of cryptocurrencies additionally requests traditional economic researchers to deal with the latest information technology. It even forces researchers, who are perhaps inexperienced in the field of informatics, to get involved in information science at least at a basic level to understand the main mechanisms of the research object. This interdisciplinary assignment causes a major challenge to carry out a sound evaluation of the risk and return characteristics of cryptocurrencies, and few academics committed their research to this area. However, an academic assessment of cryptocurrencies in a portfolio context is needed to investigate the inherent risks of the cryptocurrency market as well as to point out potential return benefits from the inclusion of cryptocurrencies in a traditional portfolio. Since cryptocurrencies represent primarily digital goods, an open question remains, if cryptocurrency properties can be found in financial or alternative assets at all. This thesis attempts to examine the risk-return characteristics of cryptocurrencies with several methods including a traditional finance approach and merely statistical analyses of cryptocurrency returns. Latter are conducted only for cryptocurrencies, as well as together with the returns of financial and alternative assets. This procedure ensures a balanced assessment of cryptocurrency properties in a portfolio context and helps to answer the question, if cryptocurrencies should be considered in the investment process from an academic point of view. The objective of this thesis is to investigate the risk-return characteristics of cryptocurrencies and asses them in a broader portfolio view. For this reason, the cryptocurrency market development is investigated over time, and the inherent risk-return characteristics are examined. Furthermore, it is tested how cryptocurrency returns are evaluated within several traditional finance optimization frameworks. Also, this thesis emphasizes on sensitivity parameters that most optimizations are subject to and that eventually influence optimal portfolio outcomes of traditional investors. To assess cryptocurrencies in a portfolio context, the focus is set on the investigation of cryptocurrency return correlations, both among each other and in relation to other asset returns. Finally, the whole approach attempts to find indications of relevant cryptocurrency return factors and to suggest long-term drivers of the cryptocurrency market. Beside all these objectives, the scope of the thesis can also serve as a starting point for future academic research in this field and contribute to the general understanding of the cryptocurrency markets. In particular, it is not excluded that interested readers may find an alternative perspective of the risk assessment of their overall portfolio.|