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Crypto's ability to improve the profitability of diversified investment portfolios comes despite its volatility, especially the recent market crash that occurred in May.
The study titled “Cryptocurrencies and the Sharpe Ratio of Traditional Investment Models” examined changes in the risk-return profile of various portfolio allocation methods due to the addition of cryptocurrency assets.
This risk-return study was conducted by measuring changes in the Sharpe ratio – the measure of the excess return earned for holding a volatile asset – when crypto positions were included in the various asset portfolio models.
Now that crypto is supposedly an uncorrelated asset class, the risk-return performance of investment portfolios should improve with the addition of cryptocurrencies, despite their seemingly volatile price movements.
Adopting a passive investment strategy, the study charted changes in the Sharpe ratio for traditional portfolio models with the introduction of cryptocurrency exposure against a benchmark index without cryptocurrency allocation.
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