Diversification Benefits of the Bitcoin

Abstract

The overall performance of a portfolio is the utmost measure of success for the skills of the portfolio’s manager. The Sharpe ratio and the modified Sharpe ratio have been some of the most referenced standards used in finance, to evaluate the efficiency of funds and hedge funds managers, however; such an ordering should be accompanied by proper statistical inference. In this work we examine whether Bitcoin can diversify significantly a reference portfolio composed from the five best performers of the Dow Jones Industrial Average for 2017 that is, Apple, Boeing, Caterpillar, Visa, and Walmart. The portfolios are constructed via analytical solutions in the mean-variance framework, constrained optimization for the cases of long-only and risk-parity portfolios, and an equal weight strategy. The statistical significance of the Sharpe and modified Sharpe ratios differences is examined via a variety of tests. The results indicate that Bitcoin can significantly improve only the Sharpe and modified Sharpe ratios of the minimum variance and risk-parity portfolios. On the efficient frontier, the tangent portfolios are dominated by the traditional stocks.