Skewness, Cryptocurrency, and Peer-To-Peer Loans: An Asset Allocation Exercise for a Unique Student-Managed Fund

Abstract

We incorporate skewness and kurtosis into an optimization process for a unique student-managed fund. Unlike the vast majority of such funds, which hold only equity, our fund includes REITs, cryptocurrency, and peer-to-peer loans. Adding these unusual asset classes allows our students to explore portfolio management concepts more generalizable than just picking stocks. While most of our assets cannot be recommended based solely on traditional mean-variance analysis, they nonetheless offer beneficial contributions. Using polynomial goal programming to incorporate higher moments in our optimization, we find that asset classes dominated in mean-variance space can make meaningful contributions to the full risk-return profile of the portfolio. In particular, we find that including cryptocurrency and peer-to-peer loans can increase the skewness and decrease the kurtosis of our portfolio.