Mar 31, 2023 – (SeoXnewsWire) – Investments Global broker Edward Miller says that diversification is one of the best ways to earn risk-adjusted returns. Cryptoassets, which lack any easy classification as a traditional asset class, and have little or no correlation to other asset classes, can provide investors with the potential to increase their risk-adjusted return according to research. Investing in digital assets should become an integral part of an investor’s portfolio allocation strategy.
Cryptocurrencies have seen significant returns throughout the past year, with digital assets such as Bitcoin worth more than double the value compared to just a few months ago. These returns, along with the low correlation to other markets, are leading to a growing consensus among investors that cryptocurrencies should be included in an allocation’s basket of assets.
The potential benefits of including cryptocurrencies in any portfolio should not be taken lightly, as increased returns and lower risks can significantly boost long-term performance. The low correlation allows investors to increase their exposure to profitable assets while reducing the overall volatility of their portfolio.
Furthermore, decentralised finance and the growth of non-fungible tokens (NFTs) and DeFi tokens provide a new layer of diversification and risk-adjusted returns that traditional assets do not offer. These assets offer the potential to increase returns and decrease the risk of portfolio failure during difficult economic times.
There are some risks to consider when buying digital assets, which investors should be aware of. Digital assets are extremely volatile, and as such are subject to significant price swings and changes. Additionally, there is a lack of regulation in the cryptocurrency space, making it a more risky place to invest. In order to reduce the risk associated with investing in digital assets, investors should spread their investments across a range of assets, not just focus on cryptocurrencies.
Overall, it is clear that cryptocurrencies and other digital assets offer an additional layer of diversification and potential returns that should not be ignored. With the right research, investors can incorporate digital assets into their portfolio in a safe and responsible manner and benefit from the risk-adjusted returns that comes with it.
A diversified portfolio is an investment strategy where an investor balances their portfolio across a variety of asset classes to achieve a desired return with minimized risk. It is based on the investment principles suggested by Nobel Laureate, Harry Markowitz within his 1952 treatise “Portfolio Selection.”
Markowitz suggested that selecting a portfolio should be done in two stages: forming beliefs of the future performance of available assets, and forming the portfolio based on those beliefs. He also posited that investors are risk-averse, and that investors may choose a portfolio with less risk even if other portfolios with similar expected returns were available.
Today, a diversified portfolio often involves a blend of stocks, bonds, real estate investments, commodities and other strategies. By diversifying across these asset classes, an investor can spread their risk out among a variety of investments, which can help minimize the impact of any single asset’s fluctuation in price on their overall portfolio.
When constructing a diversified portfolio, the primary concern is balancing risk and return. In other words, seeking a balance between investments that are expected to give higher returns but are also associated with higher levels of risk, and investments with lower levels of risk that have lower expected returns.
When constructing a diversified portfolio, it is also important to take into consideration your personal financial situation and goals, as well as your time horizon and risk tolerance. With a clear understanding of your financial situation and future goals, you can create a portfolio that best meets your needs while balancing the inherent risks and returns of investments.
By diversifying their portfolio based on the principles set forth by Markowitz in 1952, investors can maximize their return and reduce risk across asset classes. Though the task may seem daunting, the benefits of having a diversified portfolio can be immense. By implementing a well-constructed plan, individuals can rest assured that their financial future is in good hands.
Role of bitcoin in a diversified portfolio
As the traditional finance industry continues to evolve and new alternative asset classes become available, financial professionals and world citizens alike are re-examining the role of Bitcoin in a diversified portfolio.
Bitcoin is an innovative and secure digital asset, with a decentralized and public ledger, that can act as a powerful tool for diversifying a portfolio, particularly in times of economic uncertainty. It has proven to be an uncorrelated asset, or one that does not directly comove with traditional investment asset classes, such as stocks and bonds, which gives investors the opportunity to earn returns that are not exposed to the same risk factors of more traditional investments.
In their study, Kritzman et al. used domestic equity, foreign equity, government bonds, corporate bonds, REITs, commodities, and cash as asset classes. Incorporating Bitcoin into a portfolio can have some unique benefits, particularly beyond those seven asset classes. For example, because of the low correlation to traditional financial assets, Bitcoin helps to create a more balanced and diversified portfolio. This can help further reduce the risk of portfolio losses and lead to higher overall returns. Additionally, due to its decentralized nature and potential upside potential, Bitcoin is a potentially attractive asset to add to a portfolio of predominantly low-yielding investments.
In addition to the non-correlation benefits it brings to a portfolio, adding Bitcoin also presents portfolio oversampling opportunities. Portfolio oversampling is the process of adding a digital asset that is not related to other investments in order to unlock further diversification, and it is something that traditional portfolio optimization practices currently cannot do. By adding Bitcoin, investors can ensure they are receiving a higher level of diversification, which could bring the potential for further returns.
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